Central Asia Metals (LON:CAML): H1 2019 Interim Results
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Dividend Maintained After Strong First Half
Central Asia Metals (LON:CAML) reported strong interim results, maintaining the 6.5p interims dividend along with an increase in H1 2019 free cash flow of 10% to US$35.5m despite a 7%, 18% and 22% YoY decline in average copper, lead and zinc pricing in the period. Metal sales were in line with previously announced production with 6.5kt of copper, 13.7kt of lead and 9.7kt of zinc sold, up 7%, 0% and 5% YoY respectively. This resulted in a decrease in revenue of 12% YoY to US$84.7m in H1 2019.
However, a 35% reduction in SG&A along with a 4% reduction in Kounrad unit costs to US$0.51/lb YoY as well as lower than expected cost inflation at Sasa of 7% YoY to US$0.47/lb meant that EBITDA declined by 12% to US$56.7m maintaining a 63% margin. Minimal FX impact then meant that net income of US$27.6m was just 3% lower YoY. The period of challenging market conditions therefore highlights clearly CAML’s investment case based on low cost and consistently cash generative assets.
Outlook For Cost Base Strengthened
As a result of the recent weakness in commodity prices we have reduced our 2019F copper and lead forecasts by 5% and zinc by 6%. However, the unexpected reduction in SG&A combined with the lower than expected unit costs at Sasa and Kounrad mean we are reducing our full year unit cost forecasts by 4% and 7% respectively to US$0.49/lb and US$0.53/lb. The overall impact of this stronger outlook means that despite the reduction in our revenue forecast of 6% to US$167.7m our estimates for EBITDA and net income are broadly unchanged at US$111m and US$52.7m meaning we expect CAML to maintain its full year dividend at 14.5p for 2019F.
Recommendation and Target Price
The impressive cash flow generation in H1 2019 amid challenging market conditions for CAML highlights to us the value potential in the shares which are down 6% YTD despite a 10% increase in FCF YoY. Meanwhile, the 7% dividend yield and 3% discount to peers on a EV/EBITDA multiple basis further highlight the ongoing value disconnect.
We reiterate our Buy recommendation although raise our target price to 292p which implies 43% upside and 50% on a total return basis.