Australia | Feb 24 2012
– Iluka delivers solid full year result
– Build up in inventories a potential issue
– Zircon price outlook uncertain
– Earnings estimates lowered
– UBS downgrades to Neutral, suggests caution is justified
By Chris Shaw
Net profit after tax for Iluka ((ILU)) for 2011 was $541.8 million, a significant increase from the 2010 profit of $36.1 million, thanks to significant increases in minerals sands prices over the course of the year.
When one-off items are removed the 2011 result was a little better than had been expected by the market. UBS notes lower costs helped in this regard, though these costs came down due primarily to a build up in inventories.
UBS points out this means Iluka was effectively limiting sales to support recent price increases. This need, and the fact competitors may look to settle at lower prices over longer periods than Iluka has recently settled, creates some uncertainty in UBS's view.
Citi agrees, noting Iluka has lowered zircon production guidance from around 550,000 tones to 500,000 tonnes for 2012 given weak short-term demand conditions. Brokers have accordingly lowered production estimates to reflect this new guidance, while also trimming expectations for rutile and synthetic rutile output.
Changes to production forecasts have translated into changes to earnings expectations. Macquarie for example has lowered its 2012 earnings per share (EPS) forecast to 250c from 303c previously, while its 2013 estimate falls to 371c from 386c.
Citi has been similarly severe with changes to its forecasts for the coming year, lowering its EPS estimate by 21% to 261.3c. Consensus EPS forecasts for Iluka according to the FNArena database now stand at 252.9c this year and 349.5c in 2013.
Despite the cuts to its estimates, Citi continues to rate Iluka as a Buy. While the outlook for the zircon market this year is not clear Citi argues the market is looking too much at the short-term as ongoing structural deficits in mineral sands markets suggests no weakness in prices. As well, Citi notes Iluka has the balance sheet strength to carry inventory through the current period of uncertainty.
Macquarie is among those to agree with the positive view of Citi. On Macquarie's numbers recently settled rutile price increases of 80-90% should deliver an uplift of around $500 million over margins achieved in the second half of last year.
Even allowing for a dividend rate of 50%, which is above management's guidance for a payout ratio of 40%, these numbers suggest net cash of more than $700 million by the end of this year. For Macquarie, this suggests potential for higher dividends or capital management.
UBS argues a more cautious view is justified, as the uncertain zircon market outlook implies further increases in prices will be tougher to achieve. Given this, and the fact Iluka's share price has risen strongly over the past two years on the back of higher prices, is enough for UBS to downgrade to a Neutral rating from Buy.
This brings broker ratings closer to balanced, as the FNArena database shows Iluka now scores five Buys compared to three Hold recommendations. The consensus price target according to the database is $20.57, down from $21.07 previously.
Shares in Iluka today are weaker and as at 12.00pm the stock was down 24c at $16.62. Over the past year the stock has traded in a range of $9.50 to $19.46, the current share price implying upside of more than 24% relative to the consensus price target in the FNArena database.
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