Rinker Is Clearly Too Cheap, Intersuisse Says

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By Chris Shaw

The share price of former market darling Rinker (RIN) continues to slide, the stock falling below $15.50 today after having traded above $17.00 in late June and above $21.00 in early May. The slide follows downgrades last month by both UBS and Credit Suisse, who lowered previously positive ratings to Neutral recommendations.

Intersuisse continues to support the stock though and suggests investors take advantage of the current weakness, as in its view the stock is now oversold. It expects a recovery in the share price after the company’s 1H07 profit result in November, where it expects a continuation of the company’s strong recent earnings performance.

The broker estimates pre-abnormal profit for FY07 will be $1,089.2m, increasing to $1,209.4m in FY08. This translates to earnings per share of 121.4c and 135.4c respectively, putting the stock on a P/E ratio of about 13x next year and less than 12x in FY08.

Given these estimates have been adjusted to account for a likely slowing in the US housing sector, where Rinker generates about 85% of its earnings, the broker maintains such a discount is excessive given the company has consistently demonstrated its ability to maintain margins. This is unlikely to change in its view as it notes the company has a strong source of supply of both aggregates and cement, while shortages generally in its markets are assisting the company in increasing and maintaining prices for its products.

Intersuisse suggests this ability to maintain margins should see the stock trade on a P/E of about 16x in FY07 and 14.5x in FY08, which translates to a share price of $19.50. In comparison, UBS recently cut its target price to $17.55, which is of interest as its EPS estimates are not too far from Intersuisse at 125c in FY07 and 129c in FY08. Credit Suisse remains the most bearish in EPS terms, forecasting 90.9c in FY07 and 104c in FY08, but settling on a price target of $19.00.

Market consensus is somewhere in between, Thomson One Analytics showing a median EPS forecast for FY07 of 128c, with a median price target of $21.05. The FN Arena database shows an average target price of $21.88, with the stock receiving six Buy ratings, one Accumulate and three Hold ratings.

The debate continues.

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