Expectations Up For ERA

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Chris Shaw

Last year was something of an “annus horibilis” for Australian uranium producer Energy Resources of Australia ((ERA)), as flooding in the first half of the year caused the group to declare force majeure on contracts just as the uranium price was peaking.

Happily though the outlook has improved significantly and Macquarie, while rating the stock as Neutral, now regards the company as the top pick in the Australian uranium sector as operations are now back on track and earnings are poised for significant growth.

The operational turnaround was evident in yesterday’s better than expected December quarter production result, which showed total production of 1,553 tonnes for the three months and annual output of 5,412 tonnes, which was above most broker forecasts.

The better than expected output was matched by an improvement in the average realised price the company received for its output, UBS noting the 2007 average of US$25.06 per pound implies a realised price of US$30.81 for the second half of the year.

Macquarie sees this as a further long-term cause for optimism as the company should be able to deliver strong earnings growth in coming years as it rolls off its fixed price contracts and enjoys the benefits of spot prices, which are currently closer to US$90 per pound.

Following the result most of the brokers to cover the stock have lifted their earnings forecasts, some for 2007 only but others for the 2008 year as well. UBS was one of the more aggressive in this regard and lifted its 2007 estimate by 60% to $81 million while increasing its 2008 forecast 41% to $136 million, while ABN Amro increased its estimates by 67% and 66% respectively to $88.18 million and $117.6 million.

JP Morgan was more conservative and only increased its 2007 estimate by 28.5% to $47.2 million while not adjusting its 2008 forecast, whereas Deutsche Bank increased its 2007 forecast by just over 8%.

In earnings per share terms there remains a wide band of estimates with 2007 forecasts as high as ABN’s 46.2c and as low as JP Morgan’s 24.7c, while for 2008 the range is from ABN’s 61.6c to Deutsche Bank’s 109c.

Where there is greater agreement is the view the stock looks cheap longer-term, Macquarie pointing out by 2010 the stock should be trading on a P/E (price to earnings ratio) of around 8x.

UBS agrees and the broker has backed up its view by upgrading its rating to Buy from Neutral, pointing out not only is there upside from average prices received moving higher as the old contracts roll off but there is valuation upside of as much as $4.50 per share from exploration success that will extend mine life at the Ranger operation.

Overall the FNArena database shows the stock as rated Buy four times, Neutral twice and Sell once, with an average price target of $23.05, up from $22.15 prior to the quarterly report. Thomson One Analytics shows a median price target of $23.40.

Shares in ERA today are slightly higher and as at 2.30pm were up 15c at $19.88.

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