Iluka In A Sweet Spot

This story features ILUKA RESOURCES LIMITED. For more info SHARE ANALYSIS: ILU

– Iluka has (again) lifted zircon and TiO2 price guidance
– Stockbrokers have responed by (again) lifting earnings estimates
– Not everyone sees a higher share price ahead

By Chris Shaw

Mineral sands play Iluka ((ILU)) has enjoyed strong price increases for its products in recent months, which has driven strong share price performance. The good times appear to have further to run, as an update from management this week indicated while zircon price guidance was largely in line with expectations, TiO2 price guidance was higher than most in the market had anticipated.

Deutsche Bank notes guidance for the second half of 2011 for TiO2 implies 70% price gains relative to the previous half, while zircon prices are expected to increase by 35-40%. The increases reflect a continued tight market for both products, as well as price increases secured by pigment producers over the past six months.

As RBS Australia points out, Iluka's customers understand the need to provide incentives for new mine capacity after a prolonged period of relatively flat prices. The latest price increases reflect this understanding, with RBS expecting once pigment prices become more stable Iluka will receive more push back in pricing negotiations.

Iluka supplies over 30% of the world's zircon and is the second largest producer of TiO2. With shortages in both markets likely to continue until around 2013/14, Deutsche Bank suggests Iluka is in a powerful market position. 

This is reflected in increases to earnings forecasts, with most brokers covering Iluka updating their models instantly. Changes to forecasts have in most cases been significant, With UBS lifting net profit after tax estimates for FY11 by 40% and for FY12 by 112% to reflect the new price guidance. 

BA Merrill Lynch has been less aggressive in lifting estimates by 33% and 9% respectively, this reflecting previously above market estimates. Consensus earnings per share (EPS) forecasts for Iluka according to the FNArena database now stand at 103.7c for FY11 and 215.4c for FY12. 

With higher earnings estimates come increases to price targets. The consensus price target for Iluka according to the database is now $18.92, up from $15.71 previously. Targets range as high as $22.00 for Citi and BA Merrill Lynch.

According to BA-ML, offshore investors in the chemical industry are driving the Iluka share price at present based on earnings expectations, which implies further upside is possible. As a result, BA-ML retains a Buy rating on Iluka.

A majority in the FNArena database agrees, as Iluka is rated Buy five times and Hold three times. RBS is among the Buys given the same view risks remain to the upside at present, while UBS is positive given no signs of any easing in pricing momentum shorter-term. UBS also suggests the stronger earnings outlook increases the potential for higher dividends and other capital management measures.

While JP Morgan has lifted shorter-term forecasts there are no changes to long-term pricing assumptions, which reflects the view at some point there will be a supply response in the market. Given this more cautious longer-term outlook, the broker retains a Neutral rating on valuation grounds. 

Deutsche Bank agrees, pointing out while zircon prices may have further upside, the stronger Australian dollar needs to be factored into expectations. This suggests Iluka is fairly priced around current levels, meaning no change in Deutsche's Hold rating.

Over the past year Iluka has traded in a range of $4.50 to $17.66, the current share price implying upside of better than 15% to the consensus price target in the FNArena database.

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