ERA Lifts Guidance But Uncertainty Remains

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

By Chris Shaw

Last week FNArena noted Energy Resources of Australia ((ERA)) posted better than expected quarterly production numbers (see The Mystery That Is ERA ) but as the story pointed out, the lack of earnings guidance and details as to actual sale prices from the company made it very difficult for analysts to assess what the production result meant in terms of profits for the company.

What it does mean, according to new guidance from management out yesterday, is first half earnings of about $120 million, a number well above what most in the market had been expecting. As an example, post the new guidance Macquarie has lifted its full year earnings forecast by 19%, while UBS suggests consensus estimates could rise by 30% or more when earnings are reported on July 31st.

Deutsche Bank had been forecasting a profit for the half of $89 million so in its view the updated guidance means the company’s legacy contracts are rolling off faster than had previously been expected. As UBS points out the company traditionally sells more material in the second half of the year, so with realised pricing likely to continue to improve the earnings risk for the full year is now to the upside in its view.

To reflect this the broker has lifted its earnings per share (EPS) forecast to 136c for 2009, up from 129c previously, while its 2010 forecast is unchanged at 228c. Given consensus numbers were in the order of 101c and 147c respectively, it shows how much scope there is for forecasts to be increased across the market.

RBS Australia has also increased its numbers, pointing out the guidance implies an achieved uranium price of about US$42 per pound, well above the US$36 per pound the broker had been using in its model. This may not prove to be sustainable in the broker’s view as it notes some of the company’s contracts give the buyer flexibility with respect to timing and historically this has lowered the price in the half subsequent to a half-year where prices rose substantially.

Assuming such an outcome occurs again the broker expects an achieved price of about US$40 per pound in the second half, which still sees the broker lift its EPS forecasts to 102.9c this year and to 151.1c in FY10. Its FY11 EPS forecast of 215.6c compares to UBS at 267c.

The likelihood of earnings upgrades leads RBS Australia to suggest the short-term momentum for the stock is positive, which suggests some further share price gains are possible. Longer-term though the broker suggests the stock is trading around fair value, meaning it retains its Hold rating.

It is a similar view to most in the market, the FNArena database showing a total of two Buys, four Holds and three Sells, Macquarie being one to retain its Underperform rating given its view forecasting the company remains very difficult given both a lack of information and the uneven rate at which legacy contracts roll-off.

While it is a positive interim earnings will be better than expected the broker argues the catalysts for the result are not yet known, and until they are it is inappropriate to simply extrapolate on what the full year result may be when reported. As under its uranium price forecasts its valuation on the stock is something less than $20 per share there is little obvious value in the broker’s view given a far higher share price currently, unless uranium prices increase further in the meantime.

Price targets have been increased to reflect the higher earnings guidance, the database showing an average target now of $21.48, up from $20.65 prior to the revised earnings guidance. Shares in ERA have risen accordingly in today’s trading and as at 12.05pm the stock was up 75c or 3% at $25.37, which compares to a range over the past year of $9.35 to $28.28.

Click to view our Glossary of Financial Terms