KEY POINTS:
Tower Ltd and its new Australian spin off, Tower Australia Ltd, have both received broker upgrades, with the New Zealand business tipped by one broker to be an attractive takeover target.
But the market has reacted very differently to each upgrade with shares in the New Zealand business
surging while Tower Australia lost ground.
Goldman Sachs JBWere today increased its 2007 net profit forecast for Tower, which has all of its operations in New Zealand, by four per cent to $30.9 million.
The sharemarket embraced the news with Tower's shares up 8 cents to $2.20 in late New Zealand trading.
Goldman Sachs analyst Rodney Deacon said Tower's health and life insurance operations could provide the most upside to last year's $28.1 million pro forma net profit.
"Based on improvements in the services centre, better customer retention and the reinvigoration of some products, we believe that this division can achieve above market premium growth, translating to significantly higher earnings," Mr Deacon said in a note to clients.
Tower could well be the subject of a takeover play, Mr Deacon said.
He said this could be "a dominant theme" surrounding the stock this year given the current level of corporate activity and the attractiveness of the target.
"In our view, it was a clear motivation for undertaking the separation and we understand there are a number of parties who have previously run the rule over the New Zealand operations.
Mr Deacon said any buyer would have to pay a fairly hefty premium to appease cornerstone shareholder Guiness Peat Group.
Tower spun off its Australian business, Tower Australia, and listed it on the Australian Stock Exchange last November.
Its shares did perform as well as its kiwi counterpart, however, despite receiving an upgrade from Credit Suisse.
At 1309 AEDT, Tower Australia (TAL) had fallen six cents, or about two per cent, to A$2.90 ($3.33).
But the fall could provide a good buying opportunity according to Credit Suisse, which has upgraded the stock from 'neutral' to 'outperform'.
"In the past eight days, TAL's share price has fallen 3.9 per cent while the S&P/ASX200 index has risen 2.7 per cent," analysts Arjan van Veen, Alex Chau and Ben Lin said in a note to clients today.
Credit Suisse said its current 12 month projected return for the stock implied a rate of return of 10.1 per cent above the rest of the market.
"This now leads to an outperform rating," the analysts said.
- AAP