Australia | Jul 31 2006
By Chris Shaw
As interest rates move higher across the globe the expected implication is a slowing in economic growth, which usually produces a slowdown in corporate earnings growth. But it would be incorrect to simply assume all sectors and industries will see a slowing in earnings though, as the cyclical nature of markets means some sectors are likely to enjoy higher earnings even as global growth slows down.
The paper sector is an example, as while the global economy has been enjoying a period of sustained growth it has been suffering from excess capacity and a slicing of margins thanks to higher input costs that companies in the industry have not been able to pass on.
PaperlinX (PPX) is Australia’s testament to that effect, the share price reflecting the difficult market conditions by falling from prices of around $3.90 earlier this year to below $3.00, before recently staging somewhat of a recovery.
According to Macquarie, which has upgraded its view on the stock to Neutral from Underperform, further gains are possible as the paper market appears to finally be getting itself better organised. It points to industry feedback as evidence of this, as there are indications in the market the paper producers are joining up to advise merchants in the UK of an impending 5-8% price increase for coated paper, with a similar increase likely for uncoated paper.
The issue is will the increase stick, as previously there have been attempts to lift prices that have had to be quickly undone as buying evaporated, but the broker suggests this time it could in fact be different given the more co-ordinated approach. Also supportive of the price increase staying in place is that according to ABN Amro, the demand side of the market remains strong given European market shipments rose in June.
This, the broker suggests, offers some evidence the company’s earnings may have now bottomed, with Macquarie also pointing to its success in achieving 3-4% increases in uncoated paper prices in the Australian market as a good result for earnings as it is now allowing the company to offset the higher input costs.
The broker expects the market will now increasingly focus on next year’s earnings, where it is forecasting a 23% jump in earnings per share to 22.6c from 16.2c this year, which should also prove supportive for the share price.
The FN Arena database shows there are some other brokers also expecting better performance from the stock, with its being rated as Buy three times compared to five Neutral recommendations and one Sell rating.
The average target price according to the database is $3.58, while Thomson One Analytics shows a median price target of $3.50. It also suggests the market is taking the view earnings are now at the bottom off the cycle, as it shows median earnings per share forecasts increase from 16c this year to 24c in FY07 and 33c in FY08.
PaperlinX shares today closed higher in line with the broader market, last trading at $3.44.