Australia | Sep 25 2008
By Chris Shaw
Management at PaperlinX ((PPX)) have had a few issues of late, one being an upcoming maturity of the first tranche of a multi-currency facility worth US$589 million that was due next February but has now been put off until December of next year.
While this gives the company some breathing room, there are a number of attachments, and as ABN Amro points out, some of these are less than favourable. For starters, it notes the covenants attached to the facility have been tightened and margins increased, with the company now also required to reduce overall debt levels by $150 million by next February.
According to ABN Amro, there are two ways this is likely to be achieved, with the sale of Australian Paper or an equity issue currently being considered. In the broker’s view, the fact there are two options under discussions suggests the Australian Paper sale may not go through in time, a result it expects would have a negative impact on sentiment towards the stock in the market.
Given this situation is unlikely to be resolved quickly, the broker sees the threat of an issue overhanging the stock for some time, particularly as the start-up of the Maryvale pulp mill has also been delayed until the end of this year and any sale of Australian Paper is unlikely before this plant is up and running.
As well, the broker notes the stock has rallied reasonable hard of late on the back of favourable foreign exchange movements, but it takes the view most of the gains here have now been factored into the share price. To reflect this the broker has downgraded its rating on the stock to Hold from Buy, while both GSJB Were and Macquarie have gone one better today and downgraded the stock to Sell/Underperform from Hold/Neutral.
Macquarie’s downgrade also reflects the likelihood of an equity issue if the Australian Paper sale cannot be completed, while on its numbers it sees little chance of the group getting anything like full value even if the sale can be done. The broker estimates Australian Paper has a valuation on a sum-of-the-parts basis of $691 million, whereas the company has it on its books at around $1.15 billion.
Given the uncertain outcome for the group, the broker sees little chance the stock can outperform the market and has therefore downgraded accordingly. This brings it into line with the likes of GSJB Were and Credit Suisse who also see the stock as a Sell, the latter on the potential for a weaker global economy to impact on volumes and therefore group earnings.
Not all brokers share such a pessimistic outlook, as both Citi and JP Morgan rate the stock as a Buy currently, both largely on valuation grounds and as part of a longer-term story that will eventually see conditions in the company’s markets improve.
But the two Buys are outweighed by four Hold ratings and four Sell recommendations. Deutsche sticks with a Hold as on its estimates the shares are still trading at a discount to valuation. The key remains whether or not Australian Paper does come to market, with the broker estimating a sale could destroy value from a lower than hoped for price, while an equity raising of around $150 million could dilute earnings per share by anything from 9-14%. As with Macquarie, this leads the broker to conclude there is little prospect of the shares outperforming in the shorter-term.
With so many different views on the stock it is little surprise there are a wide range of price targets, ranging from Citi’s $3.30 target post the profit result in August to UBS at $1.90. The FNArena database shows an average target price of $2.23, while Thomson One Analytics has a median price target of $2.18.
Today, shares in PaperlinX are well down as investors factor in the potential for an issue and as at 1.40pm the stock was off 20c or 9% at $2.03. Its trading range for the past year is $1.51 to $3.35.