Investment Summary
 

1. Anglo American Plc has the diversity of a product portfolio, which enables it to continue its sustainable growth.

2. The company operates with a high EBITDA margin, which benefits its business.

3. The Group has employed its capital across the various geographies which minimises its business risk.

4. The company has consistently shared its income with its investors in the form of dividends and share buyback programmes.

5. Shares are currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.


Business Overview
 

Anglo American Plc (LON: AAL) is an international mining group having operations in Australia, Southern Africa, South America and North America, and is headquartered in London, United Kingdom. The company’s primary activities include mining, exploring and processing of minerals and metals at various geographies globally. The company’s portfolio of minerals and metals include thermal coal, manganese, nickel, iron, diamonds, platinum and copper. The company seeks to secure, develop and operate a portfolio of high quality and long-life resource assets that offers an attractive long-term value creation potential through sustainable cash flow and returns. The group focuses on innovative practices and technologies to offer a high-quality range of products. The company also undertakes exploration projects, which is divided into brownfield exploration to identify resources close to existing operations and greenfield exploration to find entirely new resources.

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

Company Products



(Source: Preliminary Presentation, Company Website)

The company has a diversified products range which includes Diamonds, Copper, Platinum Group Metals, Coal, Iron Ore, Nickel and Manganese and Polyhalite.

Group’s Efficient Strategy


(Source: Preliminary Presentation, Company Website)

The company follows a three-factor strategy:

Portfolio

The Group focuses on the quality of its assets which is the foundation of its business. The diversity of its portfolio benefits it to deliver the best products and services to its customers.

Innovation

The company focuses on the innovation to enhance its performance and deliver value to its stakeholders across the value chain.

People

The Group have the right people in the right roles through which it sustained commercial success.


(Source: Preliminary Presentation, Company Website)

The company’s investment proposition built on Its Competitive Assets, Differentiated Capabilities and Sustainable Return to its stakeholders.


(Source: Preliminary Presentation, Company Website)

The major part of revenue is generated by iron ore (24 per cent) followed by PGMs (23 per cent) and Diamonds (16 per cent).

The Group majorly employed its capital in Brazil (26 per cent) followed by South Africa (24 per cent) and Chile, Peru and Columbia (20 per cent).

Growth Outlook


(Source: Preliminary Presentation, Company Website)

The company is targeting USD 3-4 billion cost and volume improvement in 2020.

Recent News

On 17^th March 2020, the company announced the temporary withdrawal of most employees and contractors from its Quellaveco copper project in Peru. The Government of Peru had announced a 15-day break of employees as a preventive measure to curb the spread of COVID-19. This had affected the construction work on the project and would result in a delay in the projects. Some critical areas of the project would continue as normal, and the whole project work would become normal when the workers could return safely.

Financial Highlights – Financial Year 2019


(Source: Preliminary Report, Company Website)

Robust Revenue & Underlying EBITDA Growth

In the fiscal year 2019, revenue during the period rose by 8 per cent over the year to $29,870 million, up from $27,610 million in FY 2018, as stronger prices for certain products more than offset price weaknesses elsewhere, reflecting benefits from diversification. Group’s underlying EBITDA rose by 9 per cent to $10 billion in FY2019 against $9.16 billion in FY2018.

Flat EBITDA Margin

Group’s Mining EBITDA margin was flat to 42 per cent as compared to last year. Profit attributable to equity shareholders of the company for the financial period was flat to $3.547 billion (31 December 2018: $3.549 billion). Underlying earnings per share rose by 8 per cent to $2.75 as compared to $2.55 in the same period last year, helping the company to announce the dividend of $1.09. The Group reported $2.324 billion of attributable free cash flow during the period. Attributable return on capital employed was flat to 19 per cent in the fiscal year 2019.

Key Performing Indicators

Strong EBITDA Margins


(Source: Preliminary Presentation, Company Website)

The group reported strong EBITDA margins for the financial year 2019. The company reported 43 per cent EBITDA margin on its Diamond business while in Copper business, it had delivered 44 per cent of EBITDA margins. In PGMs business, the Group has delivered 40 per cent EBITDA margins and in Bulks business, it had delivered 43 per cent EBITDA margins.

Consistent Returns to Investors


(Source: Preliminary Presentation, Company Website)

The company has consistently given attractive returns to its shareholders in the form of Dividends, Buyback and its Payout policy.

Financial Ratios
 
 

The reported EBITDA margin in FY19 was 31.40 per cent against the industry median of 19.40%. The reported operating margin was 20.70 per cent for the FY19. Net margin reported was 15.30 per cent for the fiscal year 2019, higher from the industry median of 3.4%. Return on equity for the same period stood at 14.70 per cent. On the liquidity front, Anglo American Plc’s current ratio stood at 1.92x. On leverage front, the debt-equity ratio of the Anglo American Plc’s was 0.43 i.e. the company is slightly more leveraged than the industry with debt-equity ratio of 0.40.

Share Price Performance


Daily Chart as on 18^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 18, 2020, at the time of writing (before the market close, at 8:59 AM GMT), Anglo American Plc shares were trading at GBX 1,187.60, down by 8.20 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,294/GBX 1,141.60. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.4485. The outstanding market capitalisation was around £18.04 billion.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare Anglo American Plc with its peers, EV/EBITDA multiple has been used. The peers are Gem Diamonds Ltd (NTM EV/EBITDA was 2.82), Ferrexpo Plc (NTM EV/EBITDA was 2.89), Kumba Iron Ore Ltd (NTM EV/EBITDA was 2.93), Vale SA (NTM EV/EBITDA was 3.03) and Warrior Met Coal Inc (NTM EV/EBITDA was 3.40). The Average of EV/EBITDA (NTM) of the company’s peers was 2.95x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare Anglo American Plc with its peers, P/E multiple has been used. The peers are Ferrexpo Plc (NTM P/E was 3.71), Kaz Minerals Plc (NTM P/E was 4.20), BHP Group Plc (NTM P/E was 7.66), Glencore Plc (NTM P/E was 8.04) and BHP Group Ltd (NTM P/E was 8.76). The average of P/E (NTM) of the company’s peers was 6.48x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the Price to Earnings ratio of the Anglo American Plc’s was around 9x which was lower as compared with the industry which shows that the company is underpriced than the respective industry. The company’s EV/EBITDA multiple is 3.8x which was lower as compared with the industry which shows that the company is underpriced than the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Anglo American V/S FTSE-100 Price – 5 Years


(Source: Thomson Reuters)

In the last five years, Anglo American Plc share price has delivered 7.79 per cent return as compared to negative 27.45 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last five years.

Dividend Yield


(Source: Thomson Reuters)

Anglo American Plc has a dividend yield of 6.77 per cent which is lower than the industry dividend yield of 8.32 per cent and the sector dividend yield of 8.17 per cent.

Anglo American V/S Industry V/S Sector – 2 years


(Source: Thomson Reuters)

In the last two years, Anglo American Plc share price declined by 26.55 per cent which is lower than the industry decline rate of 44.19 per cent and sector decline of 30.34 per cent.

Anglo American Total return- 5 years


(Source: Thomson Reuters)

In the last five years, Anglo American Plc has delivered a total return of 50.25 per cent while the FTSE All share index has delivered a total return of negative 4.91 per cent.

Growth and Risk Assessments

The company has many value-accretive projects in the pipeline with low risk and higher production. The company is well-positioned to take benefits from growth trends across the energy and industrial markets. The company using its cost synergies, had optimized its operational structure to achieve sustainable growth in the future. The company operates in multiple geographies due to which its profits can be impacted negatively due to foreign exchange rate fluctuations. Many environmental factors such as rainfall, drought etc. also determine the level of production achieved by the company. Technological developments have led to the artificial production of higher quality gem synthetics, which can have a potential loss of rough diamond sales, resulting in a negative impact on revenue. Recent Coronavirus outbreak could affect the performance of the company. However, the Group is capable enough to tackle this uncertainty with its sustainable growth model.

Conclusion

The company has shown a good top-level and bottom-level performance in the current financial year. The Operating Model implementation by the group is continuing to deliver improvements, as the group focuses on efficiency and productivity, which can be seen in the improved margins of the group. The company benefits from a range of high margin, high return and fast payback options within its existing portfolio, which is complemented by industry-leading explorations projects and backed by the best technical experts in the industry. The demand for polished diamonds has increased from Chinese and US retailers, and this can help the company. The company is planning to increase its production from its old and new operations in the coming future.

 Over the course of 4 years (FY15 - FY19), the company’s revenue surged from USD 20,455 million in FY15 to USD 29,870 million in FY2019. Compounded annual growth rate (CAGR) stood at 9.93 per cent.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 1,125.80 (as on 18th March 2020 at 12:34 PM GMT) with lower double digit upside potential, based on 2.95x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 6.48x NTM P/E (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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