Alumina
Recommendation
Alumina’s full year result was a tale of two halves. Higher commodity prices in the first half of the year was offset by lower prices and higher input costs in the second half. Net profit after tax rose 266% from last year’s shocker to US$127m. Earnings per share rocketed 270% to US$0.052 from which a full year, fully franked dividend of US$0.06 was declared (ex date 21 Feb).
Full-year ending 31 December | 2011 | 2010 | Change (%) |
---|---|---|---|
Net profit (US$m) | 127 | 35 | 266 |
Net operating cashflow (US$m) | 196 | 201 | -2 |
Capital expenditure (US$m) | 149 | 142 | 5 |
EPS (US cents) | 5.2 | 1.4 | 271 |
DPS (US cents) | 6.0 | 6.0 | n/a |
Production (m tonnes) | 16 | 15 | 3 |
Average alumina prices (US$/t) | 375 | 349 | 7 |
The big profit jump was mostly due to higher prices. Although peaking at more than US$400 a tonne, alumina prices finished the year at US$375 a tonne, 7% higher than last year. Production also rose 3% to 16m tonnes as new assets in Brazil hit their straps.
Alumina maintains a generous dividend policy and the board once again committed to paying out all earnings after capital expenditure and interest payments. This may sound enticing, but we regard it as cavalier. Alumina is a capital intensive business with no control over pricing of its output or many of its inputs. Prudence demands debt be lowered before dividends are paid; instead, Alumina assumed an additional US$200m in debt. Although not at problem levels, lower debt in a business like this is always preferable.
Despite the financial conceit, improving results suggest that our investment thesis is on track. Customers continue to shift onto new spot prices aimed at breaking the link between aluminium and alumina prices (see Alumina: lousy business, hot opportunity? on 05 Oct 11 (Speculative Buy – $1.44)). By year end, 40% of contracts should reflect the new pricing regime. The number of contracts linked to aluminium prices are declining but they’re still high so, in the short term, aluminium prices will continue to impact results. It will take time, but risk tolerant shareholders could be generously rewarded if our investment thesis plays out. Alumina’s share price has fallen 5% since 16 Jan 12 (Speculative Buy – $1.22) and it remains a SPECULATIVE BUY.