Canadian Broker Rates Paladin As Outperform

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

By Chris Shaw

When considering resource stocks on the Australian market it pays to factor in whether or not the company’s shares are either listed on or covered by brokers in other markets, as many companies have secondary listings in Canada, the UK and Europe that can attract additional investor interest.

An example is uranium play Paladin ((PDN)), as Canadian broker Raymond James has just initiated coverage with an Outperform 2″ rating on the stock and a 6-12 month price target of C$5.80, which in Australian dollar terms equates to around $6.50. Paladin is listed on the Toronto Stock Exchange.

Behind the broker’s positive view is what it sees as supportive fundamentals for the uranium industry as a whole, where the medium-term supply/demand fundamentals leave the market vulnerable to any disruptions in supply or changes to the industry structure from any corporate activity.

At the same time it notes demand growth for uranium remains relatively constant throughout the economic cycle, making it something of a defensive play during an economic downturn as is currently being forecast by many economists.

The sector also looks more attractive as over the past several months uranium equities have come down in line with both market volatility and falling spot prices for uranium, so current prices offer a relatively attractive entry level in the broker’s view.

Looking at company specific factors the broker points out Paladin’s risk profile is falling as the principal Langer Heinrich project has reached nameplate capacity and news from the Kayelekera project in particular remains encouraging.

This leaves open the potential for the company to be re-rated in coming months on the back of its developments or as a potential takeover target, while the broker also notes the expected increase in cash flow in coming years provides scope for the company to further develop its portfolio.

Production is forecast to grow solidly, the broker estimating if all its projects come on stream as expected (and this includes the company’s Mt Isa assets) its annual output could increase tenfold to around 8.9 million pounds over the next five years.

This sets the scene for solid increases in earnings, the broker forecasting earnings per share in US dollar terms of 11c this year and 20c in FY09, which in local currency terms equates to around 12.39c and 22.53c respectively. By way of comparison Macquarie is forecasting EPS of 4c and 12.4c respectively having cut its forecasts in both years to account for lower realised prices, so it is clear there remains a wide range of estimates for the company.

On the downside Raymond James points out the stock is relatively expensive compared to its peers as it is trading at around 1.6x its peers on a Price/NAV basis and is also somewhat expensive in terms of enterprise value/pound of resource.

Macquarie agrees the stock is relatively expensive and also suggests the outlook is currently not as favourable for uranium stocks as for other metals, the broker preferring Energy Resources of Australia ((ERA)) as a way of playing the uranium sector.

It rates Paladin as Neutral with a price target of $5.20, while the FNArena database shows three Buy and three Hold ratings overall with an average price target of $7.41.

Shares in Paladin today are down 24c at $4.59 as at 2.10pm.

*Outperform 2 implies the stock is expected to return 0-15% in excess of the Toronto Stock Echange Composite Index over the next 12 months in Raymond James’ methodology.

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