Information current as at 30 April 2013
Profile: Rio Tinto (RIO)
Rio Tinto is a leading international mining group with stock listings on the London, New York and the Australian Securities Exchange.
Rio Tinto's business is finding, mining, and processing mineral resources. Major products are aluminium, copper, diamonds, thermal and metallurgical coal, uranium, gold, industrial minerals (borax, titanium dioxide and salt) and iron ore. Activities span the world and are strongly represented in Australia and North America with significant businesses in Asia, Europe, Africa and South America.
Profitability is expected to increase as RIO expands its low cost and high margin assets and progressively divests lower performing assets. Management is also targeting cumulative cost savings over the next two years which could release as much as $8 per share in cash. We believe this cash could be used to fund a buyback and or special dividend.
The current PE multiple of 11.6x is discounted by 23% to the market PE of 14.9x.
This month's stocks
1. SP AusNet (SPN) – Maintain BUY - SPN’s FY13 result to 31 March 2013 can only be described as strong. Overall revenue grew 6.8% to $1.6bn and net profit after tax gained 9.5% to $279m. These numbers were in line with market expectations. The result was driven by growth in tariffs and new power and gas connections. Balance sheet remains well managed as vindicated by the refinancing of $1.4 billion in debt facilities in FY13 while maintaining the A grade credit rating. Distributions of 8.2 cps in FY13 met guidance and FY14 guidance is for 8.3 cps implying a yield of 6.4% p.a. (33% franked). The forward PE multiple of 15x is in line with the market multiple.
2. Incitec Pivot (IPL) – Maintain HOLD – Maintain HOLD - IPL reported half Fiscal 2013 net profit of $110m, a decline of 23 per cent on previous corresponding period. However, underlying net profit was down 10 per cent driven by: Moranbah plant contract write-backs, reduced commodity prices (DAP & Urea) and declining volumes (US coal). In our view near-term earnings pressure remains driven by Moranbah operational problems and lack of visibility in US coal volume recovery. Longer term, the company will benefit from a recovery in quarrying in the US and demand for fertiliser to improve agricultural productivity as global food demand increases. We therefore maintain our Hold recommendation.
3. Coca –Cola Amatil (CCL) – Downgrade to HOLD – CCL has come out with a softer than expected trading update at their recent AGM, which saw the stock tumble more than 11%. The main concern is the Australian business (approximately 70% of earnings) and in particular the Australian grocery channel (which represents 50% of Australian business & approximately 30% of Group). In our view it is likely a combination of cyclical (competitor behaviour / retailer de-stocking) and structural (further downside to margins from Supermarkets price war). At present we are unable to maintain a positive view on CCL given we are simply unable to get confidence around the short to medium term earnings of CCL’s Australian business post the trading update. Long term fundamentals remain intact: solid balance sheet, growth opportunity in the Indonesian market and leveraging its distribution capability for its alcoholic business.
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