Stock takes: On yer Pryke

Having spurned the affections of Origin Energy and forced a rather ignominious backdown from deputy-chairman and chief cheerleader Phil Pryke, it will be interesting to see if local Contact supporters now put their money where their mouths were - so to speak. The argument for rebuffing the merger proposal was that it did not reflect a fair value for Contact. That being the case, we should hopefully see some of that value reflected in the share price again soon.

The stock promptly shed a large chunk of the merger premium on Wednesday as hedge funds and other speculators bailed out. But it didn't fall back as far as the pre-merger proposal price of $6.53.

That shows not all the growth in the past few months was driven by the merger, says McDouall Stuart Securities director Chris Stone.

Aside from the long-term risks associated with its gas supply, Contact looks in pretty good shape, he says.

It always does well when demand is high and supply is short. Thanks to the icy winter, demand has been at record levels.

In the wake of the merger collapse, the share price will probably be driven by traders rather than long-term investors for a while yet, Stone says.

Other local brokers definitely see the week's events as providing a window of buying opportunity.

ABN Amro is sticking to its target valuation of $8.24 and Macquarie Bank has it valued at $8.07.

The shares closed down 1c at $7.16 yesterday. Meanwhile in Australia, Origin shareholders seem to have breathed a sigh of relief that the deal won't be sweetened. Origin shares are up 38c since Wednesday's announcement and closed at A$7.22 yesterday.

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MAINTAINING ALTITUDE

Air New Zealand shares continue to hover just above historic lows. The shares closed down 1c at $1.13 yesterday. Taking into account the five-for-one share consolidation in 2004, that puts them just ahead of the 18c they hit in September 2001, but down on the average of 26c that the Government paid to get its 82 per cent stake.

The airline is now in much better shape than it was in the dark days of 2001. As of February it had cash reserves of $1.1 billion - roughly the same as its current market cap.

High fuel prices which continue to erode profits, and negative sentiment about the aviation industry in general, would seem to be behind the malaise.

The shares actually dropped low enough this week to trigger an automatic rerating from neutral to outperform at First NZ Capital. The broking firm has a target valuation of $1.40 on the stock. But given the volatility of fuel prices, anyone investing on a short-term basis would have to be doing it as a speculative play.

The shares could get a boost if the proposed code share agreement with Qantas gets approval. But that plan is fast becoming a political football.

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CONSPIRACY THEORIES

Wellington infrastructure investor Infratil has been doing its bit to kick the code share debate along. The company found itself in the thick of a political stoush this week as the National Party picked up on concerns it had raised about a dinner meeting between Air NZ executives and Government ministers - before the public announcement of the proposal.

Infratil is already unhappy with the way the decision on the code share is being made. It will skip the Commerce Commission and the decision will be left to Pete Hodgson. It's fair to say that Air New Zealand and the Government think Infratil is seeing conspiracy theories.

On Tuesday, Air NZ chairman John Palmer called Infratil's original statement about the meeting "false and grossly misleading".

That was an ironic choice of words, points out Infratil's Tim Brown. The Commerce Commission used the same phrase in its judgment against Air New Zealand's advertising practices.

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HISTORY REPEATS

It looked like Feltex might have tuned a corner, but ... oh dear. While we await news on the white knight investor that will supposedly be along to rescue the company, it would be nice to hear a few words of reassurance from management.

Sadly, new chief executive Peter Thomas seems to be following the lead of his ill-fated predecessor, Sam Magill. He and Magill were happy to chat with the media until the going got tough. Let's hope Thomas isn't on safari in Africa.

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EXTREME MAKEOVER

The "new look" Telecom has failed to inspire any new enthusiasm from investors. In fact, in the wake of Tuesday's twin revelation (that the company will voluntarily create separate wholesale and retail divisions, and that Theresa Gattung has the full support of her board), the shares slumped to a new low. They closed at $4.02 on Wednesday and only rallied a dismal 2c yesterday to close at $4.04. That's despite the fact that the stock is now trading at a sizeable discount to almost all available broker valuations - except for the perennially pessimistic (and so far most accurate) Andrew White at Goldman Sachs, who has a target of $3.91 on the stock.

There are sympathetic views in the market place. As New Zealand's largest stock, Telecom was always going to bear the brunt of the recent global market weakness. That has presumably exaggerated the impact of the whole unbundling kerfuffle.

But then there are also those with the knives out for Gattung. Chairman Wayne Boyd is adamant that there has been no review of her position and she will oversee the implementation of the new structure.

It may be that Gattung still has three months up her sleeve to turn the sentiment around. She will have to front up at the AGM in October, and the mood then could well determine her fate.

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GOING DIGITAL

Another stock currently trading at a sizeable discount to analyst valuations is Sky Television. It could be that some investors may have been rattled by the Government's plans to provide free-to-air digital TV. This is being presented as a serious challenge to Sky's monopoly by the Government and its FreeView consortium partners (TVNZ, CanWest MediaWorks, Maori TV, RNZ and the TAB).

But analysts don't seem particularly concerned.

At Forsyth Barr, Rob Mercer is sticking to his target valuation of $7.71 for Sky. In Britain the impact of the BBC's free digital service on the commercial BSkyB has been "relatively benign", he notes.

Sky continues to have the competitive advantage when it comes to bidding for content and more free-to-air channels won't change that, he says.

ABN is less bullish, but with a target of $6.50 is still well ahead of yesterday's closing price of $5.72. Even Goldman Sachs JB Were analyst Rodney Deacon - with a Sky target price of just $5.99 - argues that free digital TV will eventually wash out to have a neutral impact on Sky.

However, TV3 owner CanWest could actually get a boost from the Government plans, Deacon notes. That's because the Government financial commitment - of $5 million a year - will remove the burden of some of the start-up costs away from CanWest. Deacon has a target value of $2.27 on CanWest. Its shares closed at $1.41 yesterday.