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Price target increased

Paladin (PDN)

 

Chart: Share price over the year to versus ASX200 (XJO)

 

Share Price: $1.795

Price target: $1.95 (Deutsche)

Broker Calls: Buy – UBS

P/E: –

Market Cap: $1,416 million

Paladin Energy is the standout stock this week, its shares up 18% over the last five days. Although market commentators cheered, long-term investors in the uranium producer, with operations in Africa, were simply relieved, as shares in Paladin have fallen almost 70% in the past 12 months.

The Fukushima nuclear disaster levelled the uranium industry, sending the uranium spot price down to below $50/lb.

Paladin thinks that higher uranium prices are in store as China looks to fuel a potential 100 reactors by 2020. A stronger spot price is crucial for Paladin’s operations to remain economically viable, argues Citi, who forecasts a loss in 2012 for the miner but a turnaround in FY13 on the back of improving uranium prices, lower costs and higher production.

With China keen on the sector, and Rio Tinto actively looking to buy uranium assets, investors are watching this sector closely.
 
Deutsche Bank raised its price target on Paladin by 8.3% to $1.95 (the stock currently trades at $1.80) based on its positive quarterly production report. The miner reported record production for the quarter ended December 2011 at its mine in Namibia and Malawi – noting a 24% increase in output, with revenue of US$69.9 million. The average spot price for the quarter was US$52.50/lb. Deutsche thinks that the stock is less risky now that the Langer Heinrich and Kayelekera operations have seemingly turned a corner following two disappointing years.

UBS says that a key milestone was passed by Paladin’s December quarter production results, and maintains its buy rating.

Paladin has cut its forecast output to between 7.1 million and 7.4 million pounds of uranium in the year to June, compared with a July forecast of between 7.4 million and 7.9 million pounds.

RBS Australia is worried about the company’s operating cash flow, its ongoing inventory build and its high gearing. Although the broker likes Paladin specifically for its uranium exposure (Citi agrees) it’s not so bullish as to back the miner over others in the mining sector over the coming 12 months.

Japan’s nuclear disaster will probably continue to plague the uranium sector until at least 2013.

Macquarie also highlights cashflow as a concern for Paladin; additionally, a higher uranium price is required for the company to meet debt rollovers without needing further funding. Its target price is set at $1.80.

Now its operational performance has turned a corner, Paladin is arguably the preferred uranium play for many brokers. A bullish outlook for uranium prices should fuel further share price gains, so keep watch.

Upgrades & Buys

Leighton (LEI)

Chart: Share price over the year versus ASX200 (XJO)

 

Share Price: $22.85

Price target: $24.50 (Macquarie)

Broker Calls: Buy – Merrill Lynch

P/E: 98.47

Market Cap:  $7,463 million

Construction and mining industry contractor Leighton Holdings is scheduled to report next month, which will give investors plenty of fodder to digest. Most will be skimming the statement for the sum of any further write-downs, especially in the Middle East. Last year Leighton faced problems recovering payment for its work in Dubai following the country’s property crash in the financial crisis.

Leighton’s two major Australian projects – the Brisbane Airport Link and Victoria’s desalination project – have been losing money head over foot, but are apparently on schedule for some sort of completion by mid-year. JP Morgan is fairly confident that there will be no further deterioration on problem projects although it stresses that the group’s 45% interest in the Habtoor Leighton Group joint venture in the Middle East will continue to weigh on earnings.

Most brokers fear further write-downs on Habtoor when Leighton reports.

But investors this week were given the first bout of good news in years as better-than-expected earnings from its Australian and Asian operations delivered an extra $20 million to its half-year profit forecast. Although the Middle East remained a concern, the market was buoyed by news that operations in local and Asian markets were supporting earnings. Leighton’s share price – down 28% in the last year – was 7% higher in the last five days.

Underlying profit after tax is forecast at about $270m for the six months to December 31, up from $250m. Net profit is expected to be $340m for the period, including a $169m after-tax capital gain from the sale of HWE Mining to BHP Billiton.

It seems that brokers are holding out more hope that conditions for Australia’s largest construction firm are improving. Macquarie has upgraded the stock to Outperform with a price target to $24.50 (it’s currently $21.85). Citi raised its price target to $22.50, and Merrill Lynch has a target price of $23.60. Deutsche Bank has raised its target price to $24.50 and retained its Buy rating.

The big risks to the stock are further impairment charges and sluggish contract awards in the Middle East.

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