Australia | Jul 25 2017
This story features ILUKA RESOURCES LIMITED. For more info SHARE ANALYSIS: ILU
Mineral sands miner Iluka Resources posted a strong beat on production and sales in the June quarter but brokers disagree over valuation.
– Production, prices beat forecasts
– Price rises implemented for second half
– Momentum positive, but valuation questioned
By Greg Peel
Iluka Resources ((ILU)) produced more zircon (used for coatings on ceramic tiles and so forth) and more rutile (from which comes titanium oxide, the pigment that puts the “white” in “whitegood”) in the June quarter than all brokers had forecast. Realised prices were also higher than forecast, leading to a beat on revenue and a greater reduction in debt than expected.
Basically it was a cracker of a quarter, leading to a solid first half. Production will nevertheless be weighted to the first half given a scheduled maintenance shutdown of the Narngulu mineral separation plant in WA for two months in the second half. Full year (2017) production guidance has thus been maintained.
The outlook is positive, with the company having implemented price rises for both zircon and rutile from July 1. Adjusting for sales on fixed contract pricing, the net price rise will equate to about 7.5%.
The company expects only moderate zircon demand growth over the next two years but believes it is the only global supplier with significant inventories, therefore well-placed to benefit from any demand increase. This makes Iluka the “swing supplier” and allows the company to control its output to match demand.
The story is better for rutile. Supply disruptions and environmental restrictions have led Chinese end-users of pigment to draw down on inventories and have forced a re-stocking cycle that is exceeding underlying end-user demand growth.
Further good news was evident in unchanged full-year production guidance for Iluka’s Sierra Rutile business in Sierra Leone, reducing anxiety around the reliability of operations in the volatile African country. Meanwhile, production is set to expand ahead with the domestic Southern Flank and Balranald developments both looking at first production in 2021, which will offset grade decline at Ambrosia.
It’s difficult to find any bad news. But the issue then becomes one of valuation.
Absolute or Relative?
In commenting on the successful June quarter, Credit Suisse (Outperform) suggests “we expect the momentum to carry through in the second half and see no negative catalysts with respect to sales volume or pricing that will change our view at this stage”. Morgan Stanley (Overweight) points out Iluka last saw zircon sales this good in the June quarter 2013.
Ord Minnett cites “positive pricing momentum and valuation support” in maintaining an Accumulate rating. UBS retains Buy given confidence in improving fundamentals and a belief the market is not yet fully accounting for price rise potential.
Macquarie (Underperform) is the only broker in the FNArena database to express disappointment in second half guidance for zircon and rutile pricing, despite first half prices having beaten the broker’s forecasts. Macquarie expected more, and notes that a forecast enterprise value to earnings multiple of 10x in 2018 and a free cash flow yield of 5% makes Iluka expensive against its peer group.
Deutsche Bank (Sell) cites exactly the same metrics in drawing the same conclusion, further noting the company’s heavy investment requirements ahead.
Analysts at Citi stuck with their Neutral rating.
All brokers have lifted their 2017 earnings forecasts and this sees the consensus target rise to $8.99 from $8.65. No changes in ratings mean a stable four Buys, one Hold and two Sells. The disparity among brokers in valuation calls is best reflected in the range of targets that net out at $8.99, from $6.80 (Deutsche) to $10.60 (UBS).
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