Hold­ing steady, de­spite head­winds

Financial Mail - Investors Monthly - - Analysis - Lisa Steyn

De­spite a good per­for­mance and strong cash flows, Glen­core’s mar­ket value re­mains out of kil­ter with those of its peers, a con­tin­u­a­tion of a trend that started early in 2018 when bad news about the com­pany’s deal­ings in the Demo­cratic Re­pub­lic of Congo (DRC) be­gan trick­ling in.

In July, this cul­mi­nated in a sub­poena from US au­thor­i­ties un­der the For­eign Cor­rupt Prac­tices Act and an­ti­money­laun­der­ing statutes, re­lat­ing to Glen­core’s deal­ings in the DRC over the past decade, and in Venezuela and Nige­ria.

In its in­terim re­sults for the year ended June 31, the com- modi­ties pro­ducer and trader re­ported that net in­come had in­creased 13% to $2.5bn and rev­enue grew 8% to $108.5bn. EPS in­creased from US17c a share to US19c, and net debt was down 16%.

In the ab­sence of op­por­tu­ni­ties for merg­ers or ac­qui­si­tions, Glen­core said it would pri­ori­tise share­holder re­turns in the form of div­i­dends and share buy­backs. The com­pany de­clared a div­i­dend in Fe­bru­ary, val­ued at $2.9bn, and en­acted a $1bn buy­back in July.

On the day of the in­terim re­sults re­lease, Glen­core CEO Ivan Glasen­berg said he hoped the strong cash flows — as

demon­strated by earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion of $8.5bn — would draw in­vestors back to the com­pany share. In the days that fol­lowed, the share lifted 4%, from R56.09 on Au­gust 8 to R58.43 on Au­gust 13.

“Po­lit­i­cal risks in the DRC and more re­cently the [depart­ment of jus­tice] sub­poena have weighed on sen­ti­ment, but the equity story’s at­trac­tive fun­da­men­tals re­main in­tact,” says a re­search note from Ex­ane BNP Paribas. “The group boasts the high­est vol­ume growth among di­ver­si­fied min­ers, a com­pet­i­tive ad­van­tage in the cur­rent in­fla­tion­ary en­vi­ron­ment.”

Gold­man Sachs an­a­lysts say that while a dis­count to peers may be war­ranted due to un­cer­tainty around the US jus­tice depart­ment in­ves­ti­ga­tion, the size of the dis­count is un­war­ranted, given strong free cash flow gen­er­a­tion, a strong bal­ance sheet po­si­tion and earn­ings and re­turns mo­men­tum.

De­spite strong fun­da­men­tals, Glen­core has been one of the worst-per­form­ing stocks rel­a­tive to its peers — year to date it’s down 16% com­pared with an av­er­age 9%, the an­a­lysts say. Gold­man Sachs’ fore­cast is for an av­er­age free cash flow yield of 16% over the next three years, with big jumps to come from cop­per, cobalt, zinc and coal op­er­a­tions.

Ger­brand Smit, chief in­vest­ment of­fi­cer at NeFG, says the dis­count is not jus­ti­fied if one con­sid­ers the sorts of fines the US jus­tice depart­ment has handed out pre­vi­ously. BHP Bil­li­ton, for ex­am­ple, was in 2015 fined $25m for al­leged cor­rup­tion — equal to just 0.04% of Glen­core’s $58bn mar­ket cap.

Oth­ers say the risks are more se­ri­ous. Se­bas­tian Spi­oGar­brah, chief an­a­lyst at DaMina Ad­vi­sors, for ex­am­ple, warns of a “black swan event”: fur­ther bad news could send Glen­core’s share price plum­met­ing, and cause it to lose the US dol­lar credit lines on which its mar­ket­ing busi­ness re­lies.

Bern­stein an­a­lysts say the trad­ing busi­ness is vul­ner­a­ble to large swings in cash flow gen­er­a­tion be­cause it re­quires high lev­els of work­ing cap­i­tal. “Head­line risk re­mains a sig­nif­i­cant con­cern,” they say.

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