Alumina (AWC) Update

Submitted by Craig Strzelecki on 6 March, 2007 - 18:02

Alumina (AWC) have a retained Outperform recommendation from stock analyst Macquarie Research Equities (MRE). Shares in Alumina (AWC) survived yesterday's sell-off relatively unscathed after the company announced a $250m off-market share buyback following approval from the Australian Taxation Office (ATO). The analyst believes AWC presents a "clear value proposition", with yesterday’s announcement only adding to this view. At the time of the result, MRE's provisional analysis indicated the potential for a A$250–350m return given the limitations dictated by the ongoing capital expenditure program and prospective balance sheet capacity. As such, while this initiative is welcomed, the stock analyst believes it has been well flagged by the company and should therefore come as little surprise to the market. That aside, MRE note that the capital component of the buyback of A$0.36ps (or around 5.0% of the current price) is particularly attractive for those investors who enjoy a low marginal tax rate. At the time of the 2006 financial result, management outlined the innovative nature of the revised AWAC funding arrangement and the buyback announcement is clear evidence of its benefits. In summary, the funding development gives investors (and the board) a greater degree of confidence that the company can continue to meet its capital requirements and ensures that Alcoa of Australia will continue to distribute dividends (with the valuable franking credits attached), even in the event that the AWAC partners approve the capital intensive Wagerup project. That's why the board has now committed to an annual franked dividend of A$0.24ps and why the board can consider such initiatives as the aforementioned buyback. At an assumed buyback price of A$7.00ps, the A$250m buyback will cancel 41.5m shares, or around 3.5% of AWC issued capital. On that basis, and assuming an interest charge of 5.5%, after tax earnings will be reduced by about A$9.0m. On the flip-side, the cancellation of ~41.5m shares is similarly expected to reduce the annual dividend commitment by ~A$10m. Therefore, AWC has effectively generated EPS accretion of around 1–2% with only minimal (or even no) future cash impact to the company and its shareholders. Furthermore, it is particularly important to note that in this instance, the analyst can certainly commend management for committing to purchase its own shares at a discount to their estimation of NPV.

Alumina Limited is listed on the Australian Stock Exchange (ASX) under stock code AWC. You can view their investor website here. AWC was listed on the ASX on 31 October, 1961. Donald Marshall Morley is the chairman for Alumina and John Marlay the CEO. The company as a joint venture interest in bauxite mining, alumina refining, alumina based chemicals and aluminium smelting via its 40 per cent interest in the series of operating entities of Alcoa World Alumina & Chemicals. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade AWC. Check your charts and good luck with your share trading!

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