Australia | Sep 20 2012
– Morgan Stanley initiates on Paladin with Overweight
– Broker attracted to improving production and margins
– Paladin's gearing position also improving
– Uranium price outlook strengthening
By Chris Shaw
Uranium producer Paladin Energy ((PDN)) offers a number of positives in that operations are nearing stability, the group's balance sheet has been de-risked and the outlook for uranium prices is improving. This has prompted Morgan Stanley to initiate coverage with an Overweight rating within an In-Line industry view.
From an operational perspective, Morgan Stanley notes Paladin's production reached 99.6% of nameplate capacity for the final two months of FY12. With output stabilising, the broker expects management will now be able to focus more on cost optimisation and boosting margins. Morgan Stanley anticipates cash costs will fall 12% to US$34 per pound in FY13.
While gearing in FY12 was around 40%, Morgan Stanley expects this will fall to below 30% in FY13 and could decline even further if asset sales are executed. This should assuage current market concerns about debt levels in the view of Morgan Stanley, especially as a recent transaction will deliver US$200 million. This will be enough to address US$134 million in debt maturing early next year.
With respect to uranium prices, Morgan Stanley is positive given the expectation the market will be in a supply deficit of 1,500 tonnes by 2014. This is likely to support higher prices, which is needed to incentivise new developments. Price forecasts have been upgraded through 2020 by Morgan Stanley.
Putting all this into its model, Morgan Stanley anticipates Paladin can grow production by more than 30% in FY13, while also lowering unit costs and generating positive cash flows. Earnings estimates reflect this, Morgan Stanley forecasting earnings per share (EPS) of US2c this year and US5c in FY14. This compares to a loss of US5c per share in FY12.
Despite this expected improvement in earnings, Morgan Stanley notes the Paladin share price remains more than 70% below its pre-Fukushima levels. This suggests the forecast turnaround is not being priced into the stock at present.
Based on its earnings estimates, Morgan Stanley has set a price target on Paladin of $1.90. This compares to the consensus price target for the stock according to the FNArena database of $1.88. Targets range from Macquarie at $1.30 to BA Merrill Lynch at $2.70.
The database shows Paladin is rated as Buy three times and Hold three times. Citi is among the brokers with a Buy rating, as despite the expectation of higher costs in the year ahead the broker agrees with Morgan Stanley that an improved balance sheet and potential for improved production levels to be maintained implies upside from current levels.
Deutsche Bank retained a Hold rating on Paladin post the recent profit result, taking the view while uranium prices remain weak there is little potential upside in the stock. Asset sales could be a catalyst in Deutsche's view, but as this remains uncertain it is not enough for the broker to justify a more positive view.
Shares in Paladin today are slightly lower in a weaker overall market and as at 11.15am the stock was down 2.5c at $1.415. This compares to a range over the past year of $1.05 to $2.01, the current price implying upside of around 34% relative to the consensus price target in the FNArena database.
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