Brokers Positive On Alumina As Focus Shifts To 2010

This story features ALUMINA LIMITED. For more info SHARE ANALYSIS: AWC

By Chris Shaw

For calendar year 2009, Alumina ((AWC)) reported an underlying net loss of $2.2 million, a result below expectations but a result JP Morgan notes was messy, being impacted by a number of one-off items, while Deutsche Bank points out volumes for the year were lower than the broker had anticipated.

With 2009 now behind it the market can and is turning its focus to 2010 and beyond, and here JP Morgan suggests the outlook is quite positive as Alumina has guided to flat average unit costs and stronger production in coming years.

Deutsche Bank agrees, as on its numbers production in 2010 should grow by 17% to 15.4 million tonnes before increasing to 17.3 million tonnes by 2012. The other big positive in the broker's view is that at the same time Alumina's production is increasing the company is approaching its ex-capex phase, which means an improvement in cash flows.

This is showing up as a restored balance sheet, as Deutsche estimates gearing as measured by net debt to equity now stands at just 11%, while Alumina's cash flows should be enough for it to repay its US$350 million convertible note issue between 2011 and 2013.

The better cash flows are also showing up through a reinstatement of dividends, as Alumina announced a payout of 2c per share for the December half-year. This is likely to be maintained, Deutsche forecasting a dividend of 4c for 2010 and RBS Australia going for an even better 7c for the full year, compared to its previous expectation of dividends not being restored prior to 2011.

Factoring in stronger cash flows together with ongoing spot sales and stronger production than it had previous forecast, RBS Australia has lifted its earnings estimates in coming years. With its net profit numbers being increased 15% in 2010 and 8% in 2011 its earnings per share (EPS) forecasts now stand at 7.7c and 14.7c respectively, while Deutsche is at 12c and 23c for 2010 and 2011.

Consensus EPS numbers according to the FNArena database are 7.3c for 2010 and 11.2c for 2011.

UBS has gone the other way and cut its 2010 earnings forecast by around 25% to reflect expected lower aluminium price leverage, but even allowing for the change the broker retains its Buy rating on Alumina given its view the shares are trading well below their long-term value.

JP Morgan agrees, estimating a value for Alumina of around $2.45, which compares favourably to the current share price. RBS Australia has also turned more positive, upgrading to a Buy rating from Hold as recent share price weakness has the stock looking cheap in absolute terms in its view. As well, it notes the current share price is at the bottom end of the recent trading range of $1.55 to $1.95.

The FNArena database shows a majority of brokers see value in Alumina at current levels as there are seven Buy ratings compared to two Holds. Citi has retained its Hold rating given some concerns over cost pressures, while it also prefers exposure to copper among the base metals.

The average price target for Alumina is $2.11 with a range of $1.80 to $2.50, while the shares today are stronger and as at 12.50pm were up 6c at $1.645. This compares to a range over the past 12 months of $0.79 to 2.06. 

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