We lower target price of Nalco to R56 (from R86) as we cut earnings, reduce our target P/E multiple to 10 times (from 11x) in line with global majors, roll forward to September 12 (from June12), take cash/share at R 23 (from R 24). At our target price, Nalco?s implied September 12 PE would be 12.4x and does not appear cheap as it is currently trading at 13.6x September 12 PE. Hindalco is our preferred metal play for more earnings stability in a volatile price environment.
We lower FY12/13 PAT by 37%/23% as we incorporate FY11 annual report data, lower LME prices (-13%/-11%), lower volumes (disruption in coal supply), higher wage costs?Nalco has signed its 5th long-term wage settlement with employees, and the revised salary is valid for ten years with effect from January 1, 2007.
Our global commodities team is relatively positive on aluminium despite the cut in prices by 13% to $2,411/tonne for FY12 and by 11% to $2,369/t for FY13. Demand has been strong, particularly in China. Below $2,300/t, a significant number of producers would make losses and we could expect production cuts. With interest rates set to remain extremely low for at least two years, inventory financing deals will likely be rolled. This should act to keep the price high.
Lower availability of linkage coal (80-85%) and poor-quality continues to be an issue. Nalco will be adversely impacted in FY12 as linkage coal usage may remain an issue and domestic coal prices were raised about 30% in February 11. It has been impacted by disrupted coal supplies from Mahanadi Coalfields in Sep11 and has been receiving 60-70% of coal requirement over the last few weeks.
We think captive coal will benefit after FY14 (Nalco expects to start mining in FY13). A 5% change in aluminium prices would impact FY13 PAT by 22%. A 5% change in R/$ rate would impact FY13 PAT by about 22%. We rate Nalco shares Sell/low risk (3L). Though aluminium is our preferred base metal, Nalco does not appear cheap as it is currently trading at 13.6x Sep12 PE.
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