Poor Performance Sees Perilya Punished

This story features COOLABAH METALS LIMITED. For more info SHARE ANALYSIS: CBH

By Chris Shaw

With commodity prices soaring in recent sessions it would be easy to assume the outlook for almost every company in the resources sector is positive but the latest profit result from zinc play Perilya ((PEM)) shows this is not a safe assumption to make.

The company delivered a below expectations result in recording an underlying loss of $2.89 million for the first half, ABN Amro noting the period was one of rising costs and lower production and this is pressuring the group’s earnings outlook. Also causing problems are the company’s hedge positions, which are out of the money and so contributing significantly to the increase in costs being experienced.

The broker doesn’t see any turnaround at the key Broken Hill operations until well into FY09 and has cut its earnings estimates post the profit report as a result, with its earnings per share (EPS) estimates falling 68% in FY08 to 12.2c and in FY09 by 64% to 10.8c. Stronger than expected zinc prices offer some upside risk to its forecasts but the broker suggests the risks are not justified and post the profit result has downgraded its rating to Hold from Buy.

Macquarie has made a similar downgrade, the broker makes the point there remains significant potential within the group in terms of the Broken Hill project, particularly if the group joins forces with CBH Resources ((CBH)) to jointly develop the project. But, the broker quickly adds, in the short-term and in the absence of any such move the shorter-term outlook remains less positive.

Macquarie’s earnings estimates reflect this and stand at 3.7c for FY08 and 14.6c for FY09, while Credit Suisse is forecasting 5c and 7.5c respectively, having essentially matched the magnitude of ABN Amro’s earnings cuts.

While significant synergies appear available from a combination with CBH Resources Macquarie doesn’t see any operational turnaround from Perilya for at least the next year, seeing little chance the market will pay up for potential in the short-term given the run of disappointments from the group.

Despite the downgrades Citi and Macquarie remain more positive than Credit Suisse, which post the result continues to rate the stock as Underperform given its expectations of continued pressure on earnings in the medium-term unless there is a significant rally in the zinc price. Aspect Huntley had been the other Buy rating in the FNArena database but earlier this week it reduced that rating to an Under Review call.

Overall the database shows the stock as rated as Buy and Sell once each, with three Holds and Aspect Huntley at Under Review. The cuts to earnings estimates have seen the average price target fall to $2.32 from $2.80 prior to the result, Credit Suisse shows the scope of downside risk with its target of $1.70 and GSJB Were analysts keeping the average high by not yet adjusting their $3.20 target from the end of last month.

Shares in Perilya today are down as the market continues to digest the downgrades to forecasts and as at 2.20pm the stock was 10.5c or more than 6% lower at $1.63.

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