AWC

Alumina Limited (AWC) has a Neutral 2 stock trading recommendation and a price target of $7.50 per share from analyst UBS. Alcoa reported Q1/07 EPS of US$0.79, slightly above consensus forecasts of US$0.76, and up from US$0.66 in the Q4/06. Management attributed the good performance to "productivity improvements in cost of goods and overheads" and a "focus on higher value-added solutions such as aerospace products, and productivity programs". Alcoa's Minority Interest line came in at US$115m (A$146m) which is generally a good proxy for AWC's NPAT. The analyst was previously projecting H1/07 NPAT of A$361m for AWC which would imply that Q2 earnings would have to be A$215m or 47% higher to reach our forecast. As a result, we have brought our 07 earnings down 7% to reflect lower production in Pinjarra, FX, and costs related to the Guinean strike. The stockmarket analyst expects that Alumina Limited's current off-market buyback program could support the stock in the near term, particularly through the pricing and scale-back periods. Additionally, aluminium prices have year to date held up at >US$1.25/lb which implies that consensus forecasts may be too low at cUS$1.10/lb. However, earnings valuations for AWC relative to BHP, RIO, Alcoa and Alcan remain high.

Alumina (AWC) have a retained Outperform recommendation from stock analyst Macquarie Research Equities (MRE). Shares in Alumina (AWC) survived yesterday's sell-off relatively unscathed after the company announced a $250m off-market share buyback following approval from the Australian Taxation Office (ATO). The analyst believes AWC presents a "clear value proposition", with yesterday’s announcement only adding to this view. At the time of the result, MRE's provisional analysis indicated the potential for a A$250–350m return given the limitations dictated by the ongoing capital expenditure program and prospective balance sheet capacity. As such, while this initiative is welcomed, the stock analyst believes it has been well flagged by the company and should therefore come as little surprise to the market. That aside, MRE note that the capital component of the buyback of A$0.36ps (or around 5.0% of the current price) is particularly attractive for those investors who enjoy a low marginal tax rate. At the time of the 2006 financial result, management outlined the innovative nature of the revised AWAC funding arrangement and the buyback announcement is clear evidence of its benefits. In summary, the funding development gives investors (and the board) a greater degree of confidence that the company can continue to meet its capital requirements and ensures that Alcoa of Australia will continue to distribute dividends (with the valuable franking credits attached), even in the event that the AWAC partners approve the capital intensive Wagerup project. That's why the board has now committed to an annual franked dividend of A$0.24ps and why the board can consider such initiatives as the aforementioned buyback. At an assumed buyback price of A$7.00ps, the A$250m buyback will cancel 41.5m shares, or around 3.5% of AWC issued capital. On that basis, and assuming an interest charge of 5.5%, after tax earnings will be reduced by about A$9.0m. On the flip-side, the cancellation of ~41.5m shares is similarly expected to reduce the annual dividend commitment by ~A$10m. Therefore, AWC has effectively generated EPS accretion of around 1–2% with only minimal (or even no) future cash impact to the company and its shareholders. Furthermore, it is particularly important to note that in this instance, the analyst can certainly commend management for committing to purchase its own shares at a discount to their estimation of NPV.

Alumina (AWC) have a downgraded Neutral 2 share trading recommendation and a price target of $7.50 per share from analyst UBS. The analysts presume the publicly listed company is maintaining a positive outlook, but trading at a premium to its peers. They have downgraded Alumina from a Buy 2 rating to Neutral 2 largely on price appreciation (the stock is up 17% since the beginning of the year). However, they remain positive on the outlook for AWC and are increasing their price target to $7.50 per share in line with their 12-month NPV. According to IRESS, consensus calls for NPAT of $573m in CY 07. The analyst project $702m in CY07, up 23% from $569m in CY 06. Their CY 07 forecast is within management’s sensitivity guidance using US$1.30/lb for aluminium in 2007 (current price is US$1.26/lb). They remain positive on aluminium underpinned by strong Chinese demand, and slow capacity growth due to limited power availability. They believe that the key risk now appears to be high valuation compared to peers: Alumina trades for 11.9x CY07E EPS and 10.0x CY08E EPS. This compares to Alcan at 8.7x CY 07E EPS and 7.5x CY 08E EPS. Similarly, Alcoa trades for 10.2x CY07E EPS and 9.1x CY08E EPS. Additionally, BHP and RIO trade for only 9.9x FY07E EPS and 8.1x FY07E EPS, respectively suggesting that there could be value in resources away from AWC. Their price target is $7.50 based on our 1 yr NPV. News flow over the next 3 months which could move the stock includes earnings upgrades, the off-market buyback and further upwards momentum in the aluminium price.

Alumina (AWC) have a Buy 2 share trading recommendation and a share price target of $7.30 from analyst UBS. AWC has reported an NPAT of A$569m inline with guidance. Guidance was $565-$585m; UBS was at $577m and the market was at $573m. AWC increased its ordinary dividend to 12cps ff (+20%) vs UBS at 10cps ff. The analyst believe the dividend could be lifted again should cash flow surprise on the upside but, notwithstanding, the rebasement provides a new floor for the dividend. AWC also announced they were looking at the potential for an off-market buyback. AWC has again provided NPAT sensitivity to changes in aluminium prices and the US$/A$ exchange rate relative to base FY 06 NPAT of A$569m. Based on AWC’s sensitivity guidance, UBS forecasts suggest that 2007 NPAT should be in the order of A$685m. Our current forecast of $774m appears high, and they will look to revise our numbers to be more in line with guidance. UBS remain positive on Alumina (AWC) underpinned by: 1) consensus aluminium forecasts remain low at cUS110c/lb vs the current price of US128c/lb implying the potential for upgrades; 2) We estimate that a buyback could be +2-3% accretive depending on size; 3) AWC is one of the only companies we cover that trades below replacement cost.

Alumina (AWC) has advised the market that CY06 earnings will fall in the range of A$565–585m, ~9% below the consensus estimate of A$635m and 6% below MRE's (Macquarie Research Equities) forecast of A$617m. MRE cautions investors not to overreact to such announcements and maintain the view that "investors should stock ~A$6.00 per share and lighten at over A$7.00 per share." MRE's Outperform recommendation for Alumina is maintained.

A compilation of updates by brokers:

If you wish to use these broker recommendations for trading shares listed on the Australian Stock Exchange, it is highly recommended that you back up your analysis using fundamental or technical analysis or a combination of both before investing in any company.

UBS has a Neutral 2 recommendation for National Australia Bank (NAB) with a target of $35 per share.

Merrill Lynch has rated the Alumina (AWC) stock as Buy (for the short term), Medium Risk with the broker noting to take profits over $8.00. Alumina Limited is listed on the Australian Stock Exchange (ASX) under stock code AWC. You can view their investor website here. UBS rated AWC with Buy 2 in May.

Last week the Australian government handed down their 2006-07 federal budget. Macquarie Research Equities (MRE) notes that "The centre piece of the Budget was the personal income tax cuts which were more widespread and extensive than the financial markets had been anticipating. This will inevitably provoke fears that interest rates may have to rise in order to offset the fiscal stimulus.
The key initiatives announced in the Budget that have notable implications for the Australian listed market are as follows:
- Reductions in the tax rates on personal income as well as increases to the thresholds for each tax rate;
- Accelerating the depreciation allowance for eligible business investment;
- Abolition of the Reasonable Benefit Limit (RBL) and age based contribution limits, and the elimination of tax of benefits paid to retires from taxed superannuation funds."
Here are some Australian listed stocks that MRE believes that will benefit from the budget:

UBS has a Buy 2 recommendation for Alumina Limited (AWC) with a sahre price target of $8.90 on the back of higher commodity price forecasts. UBS has upgraded their recommendation for AWC from Neutral 2 to Buy 2 reflecting the higher price target as a result of the higher commodity price forecasts. "Main risk is price and project delays." Valuation of $8.90 based on DCF, d.r 10%. Alumina stocks are listed on the Australian Stock Exchange (ASX) under stock code AWC. Check your charts.