Credit-Suisse opinion16 Sep 2010 13:53
Action/Event: ENRC has been a major underperformer since the April peak, driven by falling ferrochrome prices and concerns over M&A. The bad news now looks in the price and the shares are being priced for little improvement in ferrochrome prices or growth upside over the medium term. Sentiment and newsflow is being dominated by the DRC copper assets, but the high quality Kazakh asset base remains the core value driver at over 90% of our valuation. We upgrade our rating from Neutral to Outperform.
Investment Case: We believe it is now time to focus on: 1) ENRC’s asset quality and valuation; 2) growth upside; and 3) direction of the stainless / ferrochrome cycle. ENRC should be an ongoing beneficiary of the cost pressures facing the SA ferrochrome industry and we expect a growth CAGR of 10% over the next
five years, superior growth to the UK large caps.
Stainless / ferrochrome outlook: The key lead indicators, nickel prices, spot ferrochrome prices and Chinese chrome ore import prices have all begun to turn up and while we do not forecast a significant rebound in stainless production we believe the bulk of the slowdown is behind us. Spot prices are currently in the $1.1-1.2/lb range. Looking through to 2011, cost pressures and a cyclical kicker could push prices toward $1.4/lb.Risks: The move into Africa and questionable acquisition of Camrose poses the risk of a PE de-rating due to greater exposure to risky regions and potential reputational damage. We would argue that the de-rating has already occurred and that the Kazakh asset base is the core value driver. M&A is a risk but we expect acquisitions to remain ‘bolt-on’ in size and the DRC copper assets are already being heavily discounted by the market.
Valuation: We estimate a fair value of £12 based on our normalised earnings and growth model.
Sign In
Follow the stocks
