Western Areas (WSA) is a company we follow pretty closely, and although we don’t hold it at this point in time, we are keen on the stock, given the positive underlying trends likely to play out in the Nickel market over the coming years. They released 1H18 results that looked inline (just!) – as per the below table.
So the NPAT line was a miss but that’s neither here nor there. EBITDA was a tad ahead of market expectations (~1%).
Importantly, we’re seeing continued improvement in EBITDA margin which now sits at 31.4%. This a reflection on absolute cost reduction, the impact of successful new offtake contracts and a marginal increase in nickel prices. They’re talking up organic growth prospects, which we like, and they are being very disciplined in terms of costs.
- Guidance - ALL FY18 production and cost metrics maintained
- Capital management - Strong growth options = dividend decision deferred to end FY18
What is our view?
Any weakness back down to around ~$2.80, which seems a long shot, however, these stocks are very volatile, would see us dust off our buyer's hat. The market is negative WSA, with 11 sells, 3 holds and 4 buys. We like it when the market is skewed to the downside – it sets up a better chance of positive surprise.
What the market missed...
Although the numbers were inline (just) the stock could come under some pressure given negative net cash flow was bigger than some thought. That said, their balance sheet remains very strong with cash of $132m.
WSA talked up the outlook for the Nickel market saying:
“We firmly believe the shortage of clean nickel sulphides for the EV sector is a looming issue that the market has only recently acknowledged.”
That fits with recent commentary from Credit Suisse after they hiked their Nickel price deck by 20% pa to 2021. No doubt it’s a late call but they reckon that because of supply deficits, rising premiums and falling inventories – Nickel is starting to look good.
Stainless steel remains the dominant demand driver for Nickel, however the real kicker for Nickel demand in the coming years comes from LiB battery cathodes.
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James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.