Australia | Sep 05 2011
– Paladin result falls short of expectations
– Net debt increasing, cash on hand also fell
– Corporate appeal a positive
– Opinions on Paladin remain divided
By Chris Shaw
Uranium producer Paladin has disappointed the market with full year earnings, reporting a larger than expected loss for FY11 of US$82 million. Underlying earnings were also lower than expected, largely due to higher financing costs.
In its review of the earnings release, RBS Australia notes the Paladin result highlighted a number of problems. The company fell short of delivering on previous production guidance, there was a decrease in cash for the period of US$233 million and net debt is now at US$602 million.
This adds to what is already a challenging outlook, as RBS notes Kayelekera is currently operating at a cash cost above the spot price and the Langer-Heinrich project needs further cash for development. As well, the uranium industry is currently dealing with negative sentiment given fallout following the earthquake and tsunami related problems at the Fukushima plant in Japan.
The low uranium price is impacting on earnings expectations for Paladin, BA-ML cutting its numbers aggressively post the profit result to reflect a more conservative outlook. Earnings per share (EPS) forecasts for BA-ML for FY12 have fallen to US2.5c from US8.8c previously, which also accounts for lower sales volumes and higher unit costs at Kayelekera.
The revision to numbers by BA-ML has been matched elsewhere, with the likes of JP Morgan, Macquarie and Citi also lowering estimates in coming years.
Forecasts for Paladin now cover a wide range, as in EPS terms both UBS and RBS Australia are forecasting losses for FY12 but JP Morgan and Macquarie expect better than 6c per share in the coming year. Earnings should improve by FY13, with EPS estimates for that year ranging from slightly positive to around US14.5c.
The changes to forecasts have impacted on price targets. The consensus price target according to the FNArena database now stands at $2.82, down from $2.96 prior to the result.
Views on Paladin remain divided, the database showing four Buy ratings, two Hold recommendations and one Underperform. The latter is courtesy of Macquarie and reflects the view near-term headwinds will constrain cash flow generation and so increase funding risks.
RBS Australia has downgraded to a Hold rating from Buy previously, suggesting the only positive for Paladin at present is the possibility of some corporate action involving the stock. This is possible in RBS's view given the potential for an acquirer to gain from improved operational performance at Paladin's assets.
A relatively open share register would make any approach somewhat easier, but even allowing for this RBS suggests the stock is trading around fair value at current levels.
Those still positive on Paladin include BA-ML, who argues at current levels the market is heavily discounting the latent value in Paladin's non-operating asset portfolio. Management may be able to realise some of this value, as a conference call with management indicated a partner buy-in on non-producing assets is on the table. This would help alleviate the current net debt position.
As well, BA-ML expects any Langer-Heinrich Stage 4 expansion would attract strong interest from industry peers looking for joint venture development opportunities. This implies some strategic appear for Paladin and highlights there remains longer-term value in the stock at current levels in BA-ML's view.
UBS agrees, noting a high proportion of FY12 shipments already being contracted means Paladin should achieve higher than expected uranium prices. As well, the intended sale of some minority stakes should boost earnings in FY12, while cost reduction measures are a longer-term positive.
Shares in Paladin today are weaker and as at 11.50am the stock was down 8c at $1.915. This compares to a range over the past year of $1.905 to $5.61. The current share price implies upside of around 47% to the consensus price target according to the FNArena database.
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