I am a holder of AIO and think that it will prosper over the medium to long term due to its high quality assets but I think that some investors are getting ahead of themselves in future earnings and price targets.
Yes there may be premium in the price due to potential takeover (as Rowsthorn no longer has a blocking stake) but I think that a $3.00 to $4.00 is off the mark.
My rationale is as followed:
Whilst the equity issued did save the company, it did heavily dilute shareholders which will make it difficult for rapid EPS growth.
If AIO does not have rapid EPS growth, it is hard to justify why people would continue bid up AIO's share price.
By my calculations AIO is currently trading at 23 times FY10 earnings.
AIO is expected to have EBITDA of $675m - $700m in FY10.
If you take off $200m in finance costs, $272m in depreciation and amortization (FY09 levels) you are left with a pre tax profit of $203 - $228m.
Assuming a low tax rate of 15%, you are left with NPAT of $172m - $193m.
This equates to an EPS of approximately $0.055 to $0.066 per share based on the 2,926,103,883 shares on issue.
This is a P/E of 23 times.
Whilst I expect AIO to earn more in the future, I do not expect that it will double its EBITDA over the next 1 - 4 years.
Therefore I think that AIO will do well to increase EPS by 25% over the next 1 - 2 years as it would require a substantial lift in revenue given the high amount of shares on issue, interest rates at their lowest point in 40 years and amortization and depreciation charges to remain similar.
Also AIO has long term contracts with its suppliers which are not expected to see a 25% - 40% jump in any one year.
A very bullish estimate would be for AIO's EPS to increase 40% to $0.0823 - $0.0923 over the next 2 - 5 years which assumes much higher volumes and prices.
This would see AIO have the following P/E's
At $2.00 AIO would have a P/E of 21 - 24
At $3.00 AIO would have a P/E of 32 - 36
At $4.00 AIO would have a P/E of 43 - 48
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