First Active lower share price target

FIRST ACTIVE could be taken out at around 6 per share when its takeover protection expires later this year, lower than previous estimates due to uncertainty about the stability of the residential mortgage market, according to analysts.

Merrion Stockbrokers had previously said an in-market acquirer could pay €6.70 per share for First Active and still generate an after tax return of 9% after synergies.

Banking analyst Seamus Murphy says the timing and price of a bid are now less certain.

"This is likely to be heavily influenced by the more uncertain outlook for growth in the Irish residential mortgage market, with mixed signals on its current sustainability continuing to emerge.

"To reflect this increased uncertainty we now lower our estimated takeout price target to €6.00 per share," said Mr Murphy.

First Active shares tumbled 42 cent on the Iseq last week to €4.35 on indications that mortgage lending was slowing down.

Shareholder focus is on a possible takeover bid from October when the ban against any institutional shareholder building up a stake of greater than 15% is lifted.

Irish Life & Permanent has repeatedly been pointed to as the most likely buyer with the savings it could wring out of the overlap in the companies branch network and administration.

AIB and Bank of Ireland are likely to face competition hurdles if either of them attempts to buy the bank.

Any takeout would affect 146,000 shareholders, a huge number of which are small holders who were given free shares when the old First National Building Society floated in 1998.

More than half of shareholders have less than 1,000 shares and just one-fifth of First Active is held by large institutions.

The bank was tight-lipped on the prospects of a takeover at the annual general meeting in March.

Chairman John Callaghan declined to say whether any formal approaches had been made and added that the company would be the same as any other PLC when the protection runs out.

Mr Murphy said the current management team led by chief executive Cormac McCarthy has significantly transformed the bank with shares delivering a total return of over 100% over the last two years and now trade at a 2003 P/E ratio of 11.8.

Merrion has upgraded its earnings targets by 5% and 8% for 2003 and 2004 in line with First Active's recent trading update.

This said it expected pre-tax profit growth in the first half to be in the high single digits but earnings growth would be slightly lower because of tax and the new government banking levy.

This month shareholders received an average sum of 500 each as the special dividend was paid out.

This drew from a decision to reduce surplus capital by €160 million resulting in a special payment of €1.12 per share.