Value In Gindalbie

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– Gindalbie delivers improved full year earnings result
– Ramp-up at Karara continues
– Stock still offers value according to brokers
– Buy ratings remain in place

By Chris Shaw

Gindalbie Metals ((GBG)) yesterday reported full year earnings for FY11, delivering a net profit after tax of $13.9 million. The result was a solid improvement from the loss of $2.5 million recorded in FY10 and, notes JP Morgan, was significant as it included iron ore sales revenues for the first time.

While the headline result was better than JP Morgan had expected, underlying earnings actually fell a little short given some pre-production expenses. The actual earnings result was not particularly material however as production at Karara is still being ramped up, so post result there are only minor changes to JP Morgan's estimates in coming years.

There's been a similar response from UBS, the broker cutting FY12 earnings estimates by around 10% on the back of the FY11 result. In earnings per share (EPS) terms UBS is now forecasting results of 1c for FY12 and 16c for FY13, while JP Morgan is at 1.7c and 13.8c respectively.

Despite the minor changes to earnings estimates, neither broker has seen the need to adjust their respective Buy ratings on Gindalbie. For JP Morgan the rating is a valuation call, as on its numbers Gindalbie is trading at a 50% discount to estimated net present value for June 2012.

What supports the positive JP Morgan view is positive expectations for iron ore prices, which are predicted to remain high for some time. In contrast, JP Morgan suggests recent material falls in the share prices of most iron ore stocks implies the market is factoring in substantial declines in commodity prices going forward.

UBS also sees longer-term value, noting with large scale magnetite shipments expected to begin in the middle of 2012, Gindalbie is on course to deliver a net profit of $200 million in FY13. This implies an earnings multiple in that year of 3.9 times, which UBS suggests is attractive.

As well, UBS is positive as funding for the Karara project is largely de-risked. This implies the market should shift its focus to first concentrate shipments into a tight iron ore market expected next year. As shipments pick-up the other benefit for Gindablie according to UBS will be a strengthening of cash flows.

UBS and JP Morgan are not the only brokers to identify value in Gindalbie, as while others in the market are yet to update post the profit result the FNArena database shows the stock is currently rated as Buy by all six brokers providing coverage.

The consensus price target according to the database is $1.12, which is unchanged from prior to the profit result.

Shares in Gindalbie today are slightly higher and as at 11.30am the stock was up 1.5c at $0.64. This compares to a trading range over the past 12 months of $0.59 to $1.485. The current share price implies upside of around 73% to the consensus price target in the FNArena database.

In terms of where Gindalbie rates in the Australian iron ore sector, a sector review by RBS Australia leaves the broker recommending Fortescue Metals ((FMG)), Rio Tinto ((RIO)) and Atlas Iron ((AGO)) as preferred exposures.

This reflects RBS's view the market is placing too great a discount on Fortescue's expansion plans, there is a solid growth outlook and strong port position supporting Atlas Iron and Rio Tinto continues to generate record cash flows.

While Gindalbie looks cheap to RBS, the broker continues to take a somewhat conservative view given the uncertain ramp-up period underway at the Karara project. RBS does rate Gindalbie a Buy, while ascribing similar ratings to Grange Resources ((GRR)), Mount Gibson Iron ((MGX)) and OneSteel ((OST)).

 
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