featured in criterion in the australian today

Hard landing
http://www.theaustralian.news.com.au/story/0,20867,21310222-23634,00.html
* CRITERION
Tim Boreham
* March 02, 2007

Flight Centre (FLT) $15
WE'RE not sure whether to dub Lazard Asset Management's successful move to block the $17.20 a share buyout offer for the nation's biggest travel agent as foolhardly or visionary, but no one can accuse the insto of lacking courage.
Resuming after a two-day trading halt, Flight Centre shares descended $1.89 or 11 per cent to $15, eroding Lazard's 12.5 per cent stake by $20 million along the way.

If only holders had heeded Criterion's advice and SOLD at $16.85 after last October's buyout announcement.

The "back to where we were" outcome leaves Flight Centre grounded on several counts. It even raises the question as to whether founder Graham Turner - who made it clear the company's future lay away from the public's gaze - will stick with his creation.

Management is now in a position of needing to make hefty investments in its brand and retail network to win back market share lost to the internet. This is likely to depress earnings for some years, which is one reason why the founders were keen to go private.

Another burning issue is whether to undertake capital management to leverage the undergeared balance sheet and liberate $35 million of excess franking credits. Likely options are a special dividend, or a share buyback with a franked component.

It's possible the founders will return with another party, or performance turnaround alone will justify a $20 a share valuation demanded by Lazard.

We wouldn't stake our life on it. According to Turner, management's not planning any other offer. "Nothing has really changed, so I presume (the shares) will go back to around $12," Turner told Bloomberg.

With such advice from the horse's mouth, we rate Flight Centre a SELL. It's tough to battle on as a publicly listed entity when you've told investors that's not where the company's future lies.

He may have been talking his own book, but Turner made no effort to dress up last week's "relatively disappointing" half-year results. While pre-abnormal profits climbed a respectable 10percent to $37 million, margin pressures continue to bite.

Suppliers such as cute and cuddly Qantas aren't making life any easier by abolishing agent commissions altogether, or striking them on core ticket prices ahead of a raft of surcharges.

Travel.com (TVL) 38c

IN theory, leisure travellers don't need to leave the comfort of home when they can curl up with Google Earth and a copy of 101 Places Not To Visit.

In reality, the online travel business is booming because (a) it's so cheap and (b) people need to leave home to realise there's no place like home.

This brings us to Travel.com, which faces a dilemma - albeit a lucrative one - over the future of its 75 per cent stake in Lastminute.com.au.

In the latest mind-boggling online asset deal, private equity has offered $US5 billion ($6.3billion) to buy TVL's joint venture partner, the US group Sabre. Sabre owns the rest of Lastminute.com.au as well as all of Lastminute.com.

Change of ownership triggers a clause in which TVL has the right, but not the obligation, to sell its stake in the local Lastminute to Lastminute.com. The TVL board is still considering its options and has engaged an independent expert to value the stake. While it may not be legally necessary, a shareholder meeting is planned.

TVL says: "The value of any such sale would be determined with reference to the average revenue multiple for ASX-listed e-commerce companies."

Revenue multiple? The concept harks back to the dotcom era when the concept of profitability took a temporary back seat. But if that's what the written agreement says, who can argue?

Given the excitement about online assets, the Lastminute stake could well be worth much more than TVL's market cap of just under $40 million.

For example, Wotif (WTF, $4.39) generated $31 million of revenues in the half year and has a market cap of $875 million. Annualise this turnover and that means Wotif is trading on a multiple of 14.5 times revenue.

Webjet (WEB, 32c) turned over $7.35 million in the December half and has a market cap of $100 million, so a similar exercise comes up with a multiple of seven times.

Further afield, cyber job ad house Seek (SEK, $7.46) is trading on a multiple of 15.

TVL this week reported a 9 per cent half-year revenue gain to $5.5 million.

Lastminute.com.au accounted for more than half of these revenues ($2.7 million). Assume a full-year figure of $5.4 million and that suggests a value of somewhere between $35 million and $80 million - not bad for a loss maker.

Selling Lastminute would free up plenty of dough to revive the Travel.com.au brand. According to TVL directors, "revenue growth now needs to increase materially if TVL is to grow at industry rates and achieve the required level of profitability".

TVL shares are tightly held. Private equity group Co-Investor Capital Partners holds 25 per cent, while a mob called Netus - run by former Ecorp head Daniel Petre - owns 19.8 per cent. Netus is majority owned by News Corporation, publisher of The Australian.

Criterion rates TVL as a BUY, on the expectation it takes advantage of silly prevailing valuations and flogs off Lastminute. TVL offers a cheaper entry point than its grown-up cousin Wotif, which is trading on close to 40 times forecast current-year earnings.

TVL is also more attractive than Webjet, which posted slightly disappointing interim figures. However, the results were writ in black rather than red ink and we maintain Webjet as a HOLD.

Wotif may find it tough to keep growing from a high base, so we rate the stock a SELL at current levels.

Beach Petroleum (BPT) $1.17

THE upstart Beach prevailed over Santos in the tussle for Delhi's Cooper Basin assets last year, but investors have shown scant respect for the stock.

Beach's $20 million interim number posted on Monday generally exceeded expectations.

If Beach-combing analysts are right, the company's earnings and production stride will pick up markedly in the current half.

ABN Amro tips a net $113 million and EPS of 14.4c for the full year, which puts Beach on a measly PE of 8. The pace picks up further in 2007-08, with a $194 million bottom line and EPS of 21.9c.

Intersuisse forecasts similar numbers and reckons the stock should be worth $1.75 over the next year or so.

"We believe the share market has not fully appreciated the substantial improvement in the size and quality of Beach's operations," the firm says.

We agree. With Beach shares off 20 per cent since the start of the year, now's the time to BUY.