Australia | Oct 09 2007
By Chris Shaw
Lead may not be one of the more fashionable of the base metals but its price performance has been the strongest in the sector so far this year and in the view of Credit Suisse it is Perilya’s (PEM) exposure to the metal that should drive continued outperformance in the stock over the short-term.
The company is not just a one commodity company as it is best known as a zinc play, which also works in its favour according to the broker as medium-term it expects the zinc market outlook to improve.
As a result the broker has initiated coverage on the company with an Outperform rating, bringing to a perfect five-for-five the equity researchers in the FNArena universe that cover the stock and have a Buy recommendation on it.
According to Credit Suisse the stock is cheap at current levels as it is priced at only 6x FY08 earnings, this despite the likelihood of upgrades to consensus forecasts as adjustments are made to factor in ongoing strength in lead prices.
As an example of this the broker points out if current spot metal prices and exchange rates were used the stock is actually priced at just 5.2x FY08 earnings and only 4.3x its FY09 earnings.
One reason for this is in the broker’s view is the company is essentially viewed as a high cost and short mine life company, though this ignores the potential for organic growth that should lower costs and extend its mine life.
The Flying Doctor lead-zinc project at Broken Hill is one example, the broker noting the company should soon release results of a feasibility study, while feasibility studies are also forthcoming for the North Mine Deeps redevelopment and the Mount Oxide copper project.
Aside from organic growth there is scope for acquisitions, ABN Amro noting after the company’s profit result in August the cash on its balance sheet gives it some firepower in terms of buying growth if suitable opportunities arise.
On Credit Suisse forecasts the company should lift earnings strongly in FY08 and more modestly in FY09, its earnings per share (EPS) estimates set at 64.5c this year and 71c next year compared to 40.4c in FY07. By way of comparison, Thomson One Analytics shows median EPS forecasts for the company of 62c and 73c respectively.
Those investors chasing dividends should also see some rewards as Credit Suisse expects payouts of 15.9c in FY08 and 16.6c in FY09, putting the shares on a yield of 4% this year and 4.2% in FY09.
This is enough for the broker to set a price target of $5.00, which compares to the average price target in the FNArena database of 5.07. Thomson One shows a median price target of $4.95.
Shares in Perilya today are slightly weaker despite a stronger overall market and at 11.50am were down 2c at $3.97. This compares to a trading range over the past 12 months of $3.08-$5.80.