China weakness = production cuts
RESULTS
Need To Know
- In-line earnings result benefiting from strong commodity prices during the period
- Soft underlying product demand (in China). ILU is cutting synthetic rutile (SR) production for 4 months to balance supply/demand
- Production cuts will weigh on ILU share price. Industry is remaining rational with major producers cutting supply in response to soft underlying conditions
1H23 Result Overview (vs consensus)
Revenue $745m vs $712m
EBITDA $368m vs $366m
NPAT $204m vs $217m
EPS $0.483 vs $0.49 consensus
DPS 3cps vs 5cps consensus. Dividend was a pass-through only of the Deterra (DRR) dividend.
Results Highlights
We don’t see any issues with the earnings aspects of the result today. Strong commodity prices underpinned the result and ILU continues to develop its growth projects across both mineral sands and rare earth projects. Balance sheet remains in a net cash position at $343m.
Key focus is the production outlook, where ILU is cutting SR production for four months at SR1 (Capel, WA) operation from 30 Sep, given the soft underlying demand in China for mineral sand products.
The SR1 asset is a swing asset for ILU-producing high-grade titanium dioxide feedstocks. The plant was restarted in Dec 2022. ILU SR2 (Capel, WA) asset will also be offline over the four months due to planned maintenance. Both assets will recommence production in late Jan 24. FY23 guidance has been cut from 305kt to 255kt or ~17% on an FY23 basis. CAPEX has also been cut from $550m to $390m for FY23.
The key driver behind the 2H production cuts is the softer underlying demand in China for mineral sand products particularly the production of tiles/paints (the two key uses of titanium feedstocks).
ILU’s early feedback on 2024 volumes is that customers are likely to require additional volumes.
Investment Implications
Expect some chunky downgrades (~20% for FY23) to consensus earnings estimates following the production cuts. The industry is remaining rational, with ILU peers also actively managing supply against the backdrop of soft China demand.
ILU's balance sheet remains in good shape, with the company in a sound financial position to cut production. Ultimately, the weak operating environment in China is likely to prove temporary.
Near-term share price performance will be heavily influenced by changes in Chinese activity and the potential for more expansive stimulus.
Stock Overview
Share Price
Company Overview
ILU is an Australian company that produces and markets mineral sands products including zircon, titanium dioxide, ilmenite, activated carbon, and iron concentrate. They also explore rare earth elements and have operations globally.
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