RBS Report:OZ MineralsBetter late than never?OZL reported a...

RBS Report:

OZ Minerals

Better late than never?

OZL reported a strong FY10 result ahead of our estimates. We believe the company waited too long to undertake a share buy back, which would have been significantly more accretive 7 months ago when the stock was trading 40% lower. We advocate a switch into EQN for higher growth and less stretched metrics.

A strong result and, finally, a capital return OZL reported NPAT of A$587m vs our forecast of A$548m (including an impairment reversal of A$201m). Underlying earnings excluding one-off items was A$398m vs our forecast of A$346m. The key difference relative to our estimates was lower than forecast corporate items and tax rate. A dividend of 4cps was announced or A$129m, together with a proposed capital return of 12cps or A$390m (shareholder approval required). OZL has also proposed a 10 for 1 share consolidation. The company noted that its number of shares on issue was greater than its peers. We find it difficult to see the potential benefits in undertaking this initiative.

On-market buyback ? purchasing stock above NPV

OZL has also announced an on-market buyback of A$200m to run over the 12 months following the capital return. We have suggested in the past that a buyback is an effective way for the company to add value. However, that was six months ago when the share price was closer to A$1.00ps (the company could have bought back almost twice as many shares for the same amount of money). We find it disappointing that OZL has waited so long.

Undertaking a share buyback at A$1.80ps is value-dilutive on our estimates on the basis that OZL is purchasing shares above our NPV.

Investment view ? prefer EQN for copper exposure

We believe the excitement around the capital management may begin to fade in the coming weeks. OZL no longer looks cheap on based on our NPV. Now that the capital management announcement has been made, investors may look to switch into EQN for copper exposure in our view. EQN offers more appealing growth options, a significantly longer mine life, and less stretched valuation metrics, in our view.

Changes to forecasts

We have factored in the capital return, which reduces our cash balance and in turn reduces our forecast interest revenue. At the same time, we have factored in a lower effective tax rate in line with company guidance.

Key takeaways:

􀀟 We estimate the A$200m share buyback is 1% NPV dilutive and on average 2% EPS accretive.

􀀟 OZL has stated that its dividend policy is to pay out 30-60% of earnings.

􀀟 OZL has proposed a 10 for 1 share consolidation. The justification for this by the company is that the number of shares is not in line with its peers.

􀀟 OZL expects to use up carried forward tax losses this year, after which point the company will begin to pay cash tax.

Valuation and risks

Our NPV and target price for OZL has risen from A$1.52ps to A$1.55ps after factoring in the changes outlined above. Key upside and downside risks to our target price relate to changes in commodity prices and operating costs relative to our forecasts.