Australia | Oct 23 2006
By Chris Shaw
Iluka (ILU) has not been a great performer since an array of heavyweight investors such as the Packer family bought into the company some time ago as the company has consistently fallen short on expectations.
But with new management in key positions, some exploration upside and the possibility of the stock being a takeover target in the current environment the market has maintained its positive bias to the stock despite another cut to earnings guidance.
Management last week indicated profit for 2006 is now expected to be at the lower end of its previous guidance of a range of $115-$125m, though in the view of Credit Suisse the risk for earnings remains to the downside.
The broker’s view is based on increasing cost pressures as the company is dealing with a lack of water at its operations at the same time as it sees potential for margin compression as its fixed-price zircon contracts move lower on renewal as the spot price falls.
Merrill Lynch agrees the zircon price is an issue in the longer-term as it seems to have peaked, while it notes the introduction of new management in key positions poses some risk to operations as they settle in to new roles.
Both brokers are positive on the exploration outlook though, Merrills suggesting the likelihood of further positive drilling results from the Eucla Basin being released before Christmas appears high. ABN Amro also recognises this, the broker lifting its valuation to $5.01 from $4.55 to factor in additional reserves.
The broker also suggests there is likely to be little impact on earnings estimates from the lower than expected sales in the quarter, as it expects some of the shortfall will be made up in the December quarter as it is traditionally a stronger one. The broker has not adjusted its earnings estimates, noting its forecast for 2006 was already slightly below guidance.
Merrill Lynch is in a similar position, noting as its forecast was for earnings of around $111m it may actually lift its estimate slightly. Credit Suisse also sits at $111m this year, while forecasting earnings in 2007 of $133.1m and in 2008 of $109.1m. According to Thomson One Analytics the median earnings forecasts for the company are $110.4m this year, rising to $144.8m in 2007 and $137.5m in 2008.
The FN Arena database shows the stock is rated positively by the market overall, as it scores four Buy ratings, five Holds and one Underperform. The average share price target is $7.79, though this is down from $7.95 prior to the quarterly report. Despite the negatives in the quarterly report Merrill Lynch maintains a takeover is a possibility, though in the broker’s view any move would be unlikely before the middle of next year, by when the issues at the Murray Basin project will have been addressed.
Iluka shares today are weaker, as at 11.30am the stock was down 24c at $7.41.