Warning bell sounded for Kumba

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Warning bell sounded for Kumba

Published Date: 2019-08-14 | Source: INCE|Community | Author: Stephen Gunnion

 Warning bell sounded for Kumba

Ingham Analytics says unless rand weakness is maintained over an extended period, Kumba's earnings are likely to come under pressure.

Current weakness in the value of the rand could prop up Kumba Iron Ore in the short term. However, the iron ore producer's earnings are likely to come under pressure over the longer term unless rand weakness is maintained over an extended period, compensating for any softening in iron ore prices.

Kumba's share price has retreated 18% from its recent high of just under R520, reached early last month. It's likely to decline further today as the stock goes ex dividend. Ingham Analytics has a fair value and target price of R350 on Kumba and believes there could be further slippage.

The group is paying a R30.79 interim dividend for the six months to end-June after reporting a 239% rise in headline earnings prettier to 31.51c. It raised its payout ratio to 98% of headline earnings, above its target range of 50% to 75%, due to its strong attributable free cash flow.

The rand averaged R14.20 to the dollar in the six months to end-June and has since weakened sharply, providing a cushion to Kumba. However, any rebound, combined with lower iron ore prices, would be negative for the group.

Ingham Analytics says Kumba's share price has increasingly reflected an elevated premium for the high-trade iron ore it produces, which may not be sustainable.

"The commodity industry has had its share of booms and busts and given the sensitivity of Kumba to movements in the rand and iron ore, a fairly small change up or down on pricing, if maintained over a year, has a disproportionate effect on profitability," analyst Mark Ingham said. "Whilst the year to December 2019 will end on a firm note we believe this is as good as it gets for now."

Anglo American may also come under pressure as shares in Kumba decline due to its 69.7% stake in its subsidiary.

Click here to get the Ingham Analytics Kumba note with its usual insightful analysis.



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