Mineral sands operator ILU, on the surface, delivered a solid FY24 result considering the tough backdrop facing the company, which the market initially embraced, sending the stock to fresh 5-month highs before surrendering all of the gains plus a few per cent more. ILU reported group earnings 7% higher than market consensus, which translated to stronger group profit, around 20% above market expectations. However, the company’s net cash position of $201mn after lease liabilities was light on which has tempered some analyst’s outlook., namely Macquarie, which downgraded the stock.
- Macquarie’s move highlights the market concern facing the business over the next couple of years, i.e., a persistently weak Chinese property market presents an integral risk for zircon demand (and therefore ILU earnings) at a time when they are spending up on the Eneabba phase-3 rare-earths project, with some lingering concern remaining around further cost escalation.
MQG ultimately downgraded ILU on valuation grounds from buy equivalent to neutral with a price target of $7.60, still over 12% above yesterday’s close after having a ‘buy’ on the stock all the way down from $9.30 i.e. they’ve finally capitulated. While we get their conservative logic and take note of the concerns raised, especially as the market dislikes uncertainty, at MM we are looking for an improving backdrop from China as Beijing continues to deliver targeted stimulus with property front and centre of their goal.
Our more positive take on China is yet to materialise and some patience is a likely requirement, however, we think the risks raised by MQG are captured in the price of ILU, and as rare earths ramp up in the coming years, ILU remains one of our favoured picks in the resource space, albeit, at the risker end of the spectrum.
- We can see ILU trading between $6 and $8 through 2024/5. Hence, we are not considering increasing our exposure at current levels – MM is long ILU in our Active Growth portfolio from $7.20.
MM is long and bullish ILU ~$6.64
Add To Hit List
