Newcrest appears expensive but there are reasons why
stock performance could continue
Newcrest’s stock trades in line with our DCF-based valuation, which includes full value for a turnaround at Lihir as well as substantial contribution from Wafi-Golpu and the company’s other assets. Newcrest also trades for 43x FY2015 EPS and 19x FY2016 EPS. Therefore on most metrics the stock looks expensive.
However, we believe there are a number of reasons why investors could take a positive view on the stock, and these factors temper our negative view:
Default gold sector pick in Australia:With Regis dropping out of the ASX100, Newcrest is the only large-cap pure play gold stock in Australia. With political risk potentially increasing given recent news from the Ukraine, we believe investors looking for the gold ‘safe-haven’ may naturally migrate to Newcrest.
International comps trade at relatively higher P/NPV: According tor ecent work by our Global Metals & Mining team (link to report), global gold companies trade at a P/NPV of ~1.5x assuming a gold price of US$1,400/oz. This compares to Newcrest at 0.9x using the same metrics.
A new management team turnaround: We believe the market has placed alot of faith in the new CEO and his management team and is pricing in cost-cutting and a turnaround at Lihir.
On this basis we are maintaining our Neutral rating despite substantial fundamental reasons for being more negative on the stock.
