Credit Suisse : Attractive valuation & pieces falling into place
We are upgrading our rating to Outperform. With the overhang removed
from an impending writedown and clarity achieved on the choice for a 30ktpd
mill option at Tasiast we are upgrading our target multiple for KGC to 1.3x
P/NAV (from 1.1x), in line with the senior average of 1.3x. KGC also
provided clarity on production, costs and capex for 2013 and thus our
OpCFa multiple has increased to 18x (from 13x) in-line with KGC’s implied
reserve life of ~18 years. Our DCF and CF declined by 30% and 20%.
■ Negative revisions on the underlying, why the upgrade? Negative news
was expected and the stock has traded off 16% over the past two months
likely on the impending negative newsflow. After modelling the results, we
believe negative guidance has been adequately priced into the stock.
■ More importantly: KGC has the elements in place for a re-rating. In our
view a successful re-rating occurs when there is a senior level change in
strategy or personnel, followed by a period of rebasing expectations, and a
period of delivery. In early 2012, while KGC was undervalued, no real
change had occurred. Now we have had senior level management changes,
and a change in strategy. We are now approaching a period of rebasing of
expectations with guidance flowing into market expectations. Over 2013 we
expect KGC to rebuild its operational credibility by delivering on guidance.
■ To be clear this will be a challenging year with all-in-costs amongst
highest of peer group and a y-o-y production decline, and we don’t expect
out-performance operationally. But we do expect the period of disappointing
against market expectations to end and KGC to be allowed out of the
penalty box. At these valuation levels it is worth stepping in.
■ CS EPS estimates are lowered to $0.65/$0.63/$0.33 from
$1.00/$1.08/$0.65 for FY13/14/15 to reflect lower revenue and higher costs.