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Soggy tears all round: Dryblower


Tuesday, July 20, 2004
SO FAR, all that Sons of Gwalia appears to have lost courtesy of its latest profit warning is a cool $130 million from its stock market value. Dryblower thinks the final loss could be much greater than that – and not just the dollar figure.

Credibility could turn out to be the major victim of the Soggies downgrade – that, and the fact that the unappealing nickname looks like sticking because Sons of Gwalia is taking a bath from outside observers, especially from that very precious crew known as analysts.

Anger among the handful of broking staff who follow Soggies is profound. They feel aggrieved, let-down, betrayed – and all the emotions that lie between those descriptions.

With good cause.

A trip through "brokerland" over the past few months is enlightening, and will explain why it will be some time before Soggies gets a decent write-up.

Take Peter Rose at Deutsche Bank for example. On June 18 Pete told his customers that Soggies deserved to retain a buy recommendation because it might be on the verge of "a tantalising recovery?". That report, which had a bit of fun with the fact that Soggies is the world's biggest tantalum producer, concluded that the net present value of the stock was $3.38 and the share price target was $2.87.

What a surprise then for Pete when 26 days later Soggies revealed its profit downgrade for last financial year, and this financial year. It was enough for Deutsche Bank to rush out a recommendation downgrade from buy to hold and to cut the NPV estimate to $2.69 and the price target to $2.28. This report began with words that might be in the running for understatement of the year: "this is not a good outcome for Sons of Gwalia".

Dryblower hastens to defend Pete and Deutsche Bank because they were not alone. RBC Capital Markets must be ruing the day it decided to initiate coverage of Soggies on July 12, three days before the infamous downgrade.

Geoff Breen noted in the RBC report that Soggies was "above average risk" but gave the stock a "sector perform" rating (which Dryblower interprets as a hold) and set a 12-month share price target of $3.10.

Credit Suisse First Boston also joined the party with a report headed "all eyes on tantalum as electronics boom", but gave Soggies a neutral rating. UBS upgraded its view of Soggies on May 14 from neutral to buy, and then took it back to neutral on July 7 because the stock had risen strongly. On downgrade day, UBS stuck with its neutral tip and said it was reviewing its NPV value.

Even the media was sucked into believing that Soggies was on the road to recovery with Australian Associated Press picking up the original Deutsche Bank study on June 23 (five days after initial publication) and told the world that demand for tantalum was booming.

The point being made by Dryblower is not that anyone has broken the law. What has been broken is the all-important confidence link that must exist between a company and its "friends" in the stock market.

Some analysts will have been saying some very unkind things about Soggies to their clients over the past week, a view compounded by the media picking up another aspect of the downgrade story – that a big profit write-off, and possible mine closure program is set to be announced on August 23.

As with the AAP report based on the Deutsche Bank study the latest media report in the Australian Financial Review appears to mimic a report by Ian Preston from Goldman Sachs JBWere on June 3 – yes, June 3 – more than month before the official downgrade.

Preston wrote way back then that "with a new management and board, we believe there is potential for SGW (Soggies) to clear the decks with the 2004 results release in August before implementing a new strategy".

Goldman put a short-term "marketperform" rating on Soggies and long-term buy, but said that there was a potential for a $250 million write-down in carrying value of the gold division, leading to a potential loss for the year of $150 million. All this led to a cut in Goldman's value on the stock from $3.80 to $3.55.

To Ian Preston goes a Dryblower gold star for perspicacity. To just about everyone else in brokerland a report card D for missing the bleeding obvious. To Soggies, an F, not for failing to correct inaccurate analysis (how could it without breaking exchange rules?) but for not laying it all on the table in one clean hit, and for making its friends feel like fools".