Australia | Jul 06 2006
By Terry Hughes
A report from Reuters citing Constellation Capital Management analyst Peter Chilton as saying Alumina (AWC) and Alcoa would be "natural fits" for Rio Tinto (RIO) sent the Alumina share price up over 20c earlier this week, but according to Morgan Stanley this takeover speculation has been overdone.
Alumina closed on Monday at $6.89 and rose as high as $7.15 in yesterday’s trading before giving away 13c to the current $7.02.
In Morgan Stanley’s view neither BHP nor RIO are likely to acquire Alumina either directly or as part of a larger bid for Alcoa as well.
The analysts justify this view by pointing to what they see as the potential for "value destruction associated with Alcoa assets," as they calculate that Alcoa carries around US$3.7bn in goodwill in its low margin downstream business, which Morgan Stanley doubts either Rio or BHP would retain in their portfolios.
Should either company go after Alumina on its own, the analysts highlight that they "would have to relinquish control and product pricing of their alumina business to the Alcoa-controlled AWAC" JV on a 60/40 split.
While this seemingly supports the broker’s view that a takeover is somewhat unlikely, Morgan Stanley still sees enough positives in the stock to justify an Overweight recommendation and a target of $8.40.
A record half is on the horizon, the analysts observe, with the company due to report its half yearly result on August 3, with Morgan Stanley forecasting a dividend of 10c/share.
However, this dividend could potentially "surprise on the upside" due to higher prices.
They are far from alone in their positive reading of the stock’s future, with seven other major brokers also rating the stock positively, with three others remaining neutral.
The average target on the stock is $8.47 with ABN Amro the most bullish with a target of $9.50 and Deutsche Bank the least with $6.50.