Australia | Aug 02 2007
By Chris Shaw
It has been a disappointing ride for shareholders in Alumina (AWC) in recent years as while many stocks in the commodity sector have performed well Alumina’s share price is back below levels it traded at early in 2006.
The problem for the company has been while metal prices have increased so have its costs, meaning shareholders have missed out on the boost to earnings they may have expected.
The latest profit result is a good example as earnings of $271m for the half year were in line with expectations, but expectations that had recently been lowered by management.
Even allowing for recent guidance Deutsche Bank has seen enough to further cut its estimates for the second half, the broker now forecasting earnings per share for the full year of 46c against 49c previously. As it notes, the changes is a reflection of the ongoing problem of higher costs.
Credit Suisse has reacted in a similar fashion by cutting its full year forecast by 6.1% to 39.8c given higher capex and operating costs, the broker estimating the company’s cost base in the second half could be around $18m higher than for the six months to June 30.
Despite the changes both brokers continue to rate the stock as a Buy, reflecting a combination of quality assets and the potential for further consolidation in the sector following Rio Tinto’s (RIO) move on Alcan.
While UBS rates the stock as Neutral 2 it sees scope for the shares to find support around current levels given possible upside from stronger aluminium prices. The broker is currently factoring in higher aluminium prices than the result of the market, which supports its top of the market earnings forecasts of 46c this year, 56c next year and 30c in 2009. The latter two estimates have been revised down by 8% and 26% respectively following the result.
It suggests there is scope for upgrades to consensus estimates in coming months as metal prices remain stronger than prices others in the market are using for their earnings estimates, so such an outcome would likely prove positive for sentiment towards the stock.
Merrill Lynch counters this though by pointing out while there does indeed appear to be some value emerging in the stock given it is now trading around its valuation of $6.88, the current uncertain investment climate will keep investors from becoming too confident and so should limit share price performance.
The other issue against the stock enjoying a run in the short-term is the delaying of some earnings, as GSJB Were points out the Alumar expansion continues to take longer than expected and is therefore pushing out the timetable with respect to earnings performance for the company.
Overall there has been no change to ratings for the stock on the back of the half yearly result, the FNArena database showing the company as rated Buy and Hold five times each.
Target prices are where the changes to estimates are most obvious as following the result the average price target has fallen to $8.09 from $8.42. This compares to a median price target according to Thomson One Analytics of $8.50.
Shares in Alumina are weaker despite a stronger overall market today and at 11.50am were down 3c at $6.89.