Canaccord reiterates 'buy' rating on Petra Diamonds, raises target price

Petra Diamonds shares edged higher on Tuesday as Canaccord Genuity reiterated a ‘buy’ rating and raised its target price to 165p from 150p.

Canaccord said Petra’s full year trading update on 25 July was ahead of its forecasts with a total diamond production of 3.7m carats (mct), compared to the broker’s expectations of 3.6mct. Petra reported annual sales of 3.45mct, beating Canaccord’s forecast of 3.43mct.

Average diamond prices dropped 6% against estimates for a 10% decline.

However, Canaccord said net debt of $387.4m at the end of 30 June, compared to $172.1m the same period a year ago, was higher than it expected.

“While the better-than-forecast trading update for fiscal year 2016 has resulted in a modest increase in our earnings before interest, tax, depreciation and amortisation (EBITDA) forecast, from $157M to $162M, we have increased our net finance costs (given that year-end net debt was higher than we had forecast), and have also changed our tax and minorities assumptions,” the broker said.

“As a result, for 2016 our net profit estimate falls from $50M to $37M, and our earnings per share (EPS) estimate drops from 9.2 cents to 6.8 cents.”

Looking ahead, Petra said it expects diamond production in fiscal year 2017 of 4.6-4.8mct, marking a 25-30% on the 2016 production.

As a result, Canaccord has upgraded its forecast from 4.25Mct to 4.73Mct for the year. The broker also raised its 2017 EBITDA estimate from $240M to $291M, net profit from $75M to $80M, and EPS from 13.9 cents to 14.8 cents.

“With a healthy increase in diamond production, and capital expenditure set to fall significantly, Petra Diamonds is well positioned to capture the benefit of improving production quality (as it mines more run-of-mine ore) and an anticipated gradual recovery in diamond prices.”

Shares rose 0.55% to 115.63p at 1018 BST.