Solid Iluka Result A Sign Of Things To Come

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

While much of the resources sector was enjoying the benefits of higher commodity prices through 2007 and early last year, mineral sands play Iluka ((ILU)) was going through a transition as it attempted to develop new projects and recapitalise its balance sheet to set up a stronger financial position.

In the view of Deutsche Bank, this process is now largely complete as evidenced by an FY08 net profit of $32 million. The result was broadly in line with expectations given previous guidance by management. While the result itself was solid rather than overwhelming, the broker points out the earnings trend is now firmly in the company’s favour and it expects significant earnings growth in coming years.

As evidence of this, the broker is forecasting net profit to increase to $162 million this year, $229 million in 2010 and $300 million in 2011. This puts the company in a rare category among resources plays, given most are now struggling to grow earnings thanks to lower prices for their commodities. In earnings per share (EPS) terms, these forecasts translate into outcomes of 43c this year and then 60c and 79c respectively, which compares to the 9c recorded in 2008.

What will drive earnings, in the broker’s view, is new projects in the Murray and Eucla Basins that are due to come on stream in the second quarter of this year and the second half of 2010. Both are expected to be in production for as much as 40 years.

Other positives for the stock, according to the broker, are favourable movements in zircon and titanium dioxide prices. The group’s iron ore royalties should also continue to generate a relatively low risk income stream. Adding it all up sees the broker retain its Buy rating post the profit result.

Similarly positive is UBS, as while the broker has trimmed its estimates post the result to account for changes to its mineral sand price forecasts and the group’s hedging position, it continues to see solid earnings growth ahead. This, in part, reflects the company’s pricing power in its key markets.

New estimates see UBS forecasting EPS of 40c this year, 57c next year and 86c in 2011. Given management comments released along with the result were positive, the broker suggests the stock is now worth another look by investors. To reflect this it has upgraded the stock to Buy from Neutral.

Citi is another to rate the stock as a Buy. The broker points out while the its has trimmed its earnings estimates to factor in changes to hedging, production and cost numbers, the earnings growth expected from increased production from new projects coming on stream could receive an additional boost from favourable movements in the Australian dollar.

While also rating the stock as a Buy, Bank of America-Merrill Lynch offers one note of caution, pointing out there could be some risk to earnings if current contract price negotiations aren’t settled on a favourable basis. Even allowing for this and cuts to its estimates post the result to reflect more detailed earnings guidance from management, the broker retains its Buy rating.

Following the upgrade to a Buy rating by UBS, the FNArena database shows a total of six Buys, two holds and Macquarie at Underperform. However, it must be noted Macquarie has yet to revise its model for the group’s profit result. Consensus EPS forecasts according to the database for 2009 and 2010 are 36c and 56.3c respectively.

The average price target on the stock post the result has risen to $5.23 from $5.16 previously, but again Macquarie is something of an outrider here given its $3.70 target. Taking it and ABN Amro’s $4.82 target out of the mix, most price targets are firmly in the $5.00-$6.00 range. This suggests solid upside given the stock closed yesterday at $4.41.

Shares in Iluka today are little changed and as at 11.30am, the stock was up 1c at $4.42. This compares to a trading range over the past year of $3.04 to $5.40.

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