Paladin Expensive?

This story features PALADIN ENERGY LIMITED. For more info SHARE ANALYSIS: PDN

By Chris Shaw

Last week Credit Suisse initiated coverage on Australian uranium play Paladin ((PDN)) with an Outperform rating, suggesting the company offered upside from the combination of an expected lift in output in coming years at the same time as uranium prices are expected to track higher.

This week it is the turn of RBC Capital Markets to update on the stock and the broker takes a rather different view, suggesting the stock is overpriced at current levels given its trading multiple implies a spot uranium price of around US$90 per pound, well above current spot prices of around US$65 per pound.

The broker also suggests the market is factoring in significant value for the company’s exploration program and development options such as Valhalla and Skal and there are some doubts as to whether these can deliver as expected, which is a reasonable concern given the issues the company had in bringing Langer Heinrich production on line.

The latest production guidance for Langer Heinrich phase III also appears challenging in the broker’s view and this sets the stage for possible downside surprises, meaning there is risk in the stock even at current share price levels. RBC’s valuation confirms this as it estimates at current levels the share price is discounting 2.2 times the company’s estimated net asset value.

Earnings multiples also make the stock look expensive as against a sector P/E (price to earnings) average of around 22x the stock is trading on about 40x for FY09, while its forecast FY10 P/E of about 16x is still above the broker’s sector average forecast of closer to 13x.

Finally, the broker argues Paladin is something of a “name” stock in the sector and this means when there is interest in uranium stocks it is one of the first to be bought, a trend that tends to overlook the company’s relative value in its view. As a result it rates the stock only a Sector Perform with a price target of C$5.00, which compares to the average price target according to the FNArena database of A$6.27, which is based on three Buy and three Hold recommendations.

Shares in Paladin today are stronger despite a weaker overall market and as at 11.25am the stock was up 9c at $4.23, which compares to a trading range over the past 12 months of $3.80 to $9.92.

Click to view our Glossary of Financial Terms