Solid Quarterly But Challenges Remain For Iluka

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This story features ILUKA RESOURCES LIMITED.
For more info SHARE ANALYSIS: ILU
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Having been almost a chronic underperformer over the past couple of years it appears things are slowly turning around for mineral sands play Iluka ((ILU)) as the company recorded a better than expected December quarter production result.

According to UBS the output for the three months was about 5% better than had been expected, though this did not fully flow through to earnings as sales were less than production due to delays in shipments of output.

The broker also notes zircon prices have weakened of late and with this showing little sign of turning around the broker has cut its 2008 profit forecast to $1 million from $6 million previously, which compares to the estimate of $45-$50 million for the year just completed.

Given the outlook the broker sees the stock as a Hold at current levels, a view shared by ABN Amro among others. ABN’s reasoning for its neutral view is while production is clearly improving the company is facing increasing cost pressures, so it remains difficult to get excited about the stock at current levels.

Citi is more optimistic, its assessment being the company is benefiting as more production moves to the higher margin Murray Basin operations and away from its Western Australian assets, while exploration offers scope for some additional upside (though with an increase in cost pressures as well).

It rates the stock as a Buy at current levels, a view shared by Merrill Lynch on the basis the new management team is getting the operations in order and should be able to continue to deliver improved results.

Signs of any improvement in earnings terms are likely to take some time to flow through as along with UBS most forecasts call for significant lower earnings in 2008 than will be the case in the year just gone. As an example Citi’s EPS (earnings per share forecasts are 19c in 2007 and 4c in 2008, while ABN Amro is significantly more optimistic on the 2008 outlook and is forecasting EPS of 19.4c, compared to 25.2c for 2007.

Part of the range in forecasts can be put down to the currency impact on earnings, as the various analysts use different currency forecasts in their models. By way of comparison Thomson One Analytics shows median EPS estimates of 19c for 2007 and 5c for 2008.

As a result of the disparity in earnings estimates there are a wide range of price targets for the stock ranging from Macquarie’s $4.20 to Merrill Lynch at $7.00, while the FNArena database shows an average target of $5.44. This is above the median target according to Thomson One of $4.90.

The FNArena database shows Macquarie the only broker with a negative rating, compared to four Buy recommendations and five Holds.

Shares in Iluka today are weaker along with the broader market and as at 11.10am were down 26c or almost 6% at $4.34.

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