Kumba Iron Ore, trading statement context
First half earnings will be a lot lower than the first half of F2017. Whilst KIO is guiding within the JSE listing requirements benchmark of 20%, in practice we may see more than 20% downside, although unlikely much lower than that, when they have reasonable certainty.
You can read the technical trade note by Barry Dumas HERE.
Although KIO is guiding 20% down or R2,88 per share, taking EPS to R11,54, I had pencilled in a roughly R1,00 decline in interim EPS or 7%. I had a bigger decline in H2 (possibly by as much as 33%). This trading statement seems to suggest that the slide is quicker than anticipated.
We know of currency and commodity price impacts anyway, but the decline is arguably larger than one would have thoughts given the fundamental drivers. We’ll only really know when the detail comes out on or around 25 July.
The company did guide that iron pricing is budgeted at $60/ton to $70/ton and that they expected iron ore prices to slow by year end.
A R1/$ weakening has a R3 billion impact on operating profit, and vice versa. If the export price firms by $1/ton, it has a R0,5 billion positive effect on operating profit. The sensitivity is huge I currently estimate breakeven price for Kumba at around $45/ton. In general, industry and company fundamentals remain favourable.
For the full year to December 2018 I was looking at an 18% decline in earnings, from R30,50 to around R25,00 (R8,0 billion versus R9,7 billion).
To get to R25,00 on EPS for the year now means R13,46 in H2. That would be a 16% decline in the second half versus H2 F2017 or put another way a 17% increase on the R11,54 in the first half.
Given that earnings are down 20% or more in H1, getting to R25,00 could be a stretch now. It seems possible, but not probable, that EPS for the year could be closer to R23,00 or R7,4 billion rather than my estimate of R8,0 billion.
However, the ZAR/USD exchange rate in F2017 was R13,30 and given recent currency movements the outlook would be stronger in rand should the R13,50/$ region prevail.
This is not a train smash although there is now uncertainty ahead of the results release that could place a lid on the stock.
There will also be questions on the dividend. The R30,97 of F2017 seems highly unlikely in F2018. Closer to R20,00 seems more likely (down 35%) but the interim declaration would give the market the right steer.
In any event, the stock is higher than my base case, even allowing for the price easing down to R286 at close. I mentioned in previous notes that R260 per share was a fair value bottom. With the price elevated at R300 this is a useful weakening. I’d rather be on the short end and thus a Trading Sell.
Mark N Ingham
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