Overview
Glencore Plc (GLEN) is among world’s leading diversified natural resource companies, engaged in the business of production and distribution of minerals and metals, crude oil and oil products, coal and agricultural products. The company was incorporated in the 1970s as a trading company, but now the company is engaged in the production and marketing of commodities. The company currently operates in more than 50 countries and has an employee base of 158,000 including contractors. The company is currently managing over 150 mines all across the globe. The company is sourcing and marketing commodities based on sound sector knowledge and international supply base to industrial consumers which include steelmakers, power companies and automobile manufacturers etc. The company has classified its business into three reporting segments being Metals and Minerals, Energy Products and Agriculture Products. Metals and minerals include smelting, mining, processing and storage for metals like Zinc, Aluminium, Nickel, Iron Ore, Copper etc. Energy Products is engaged in coal mining and oil production and storage of crude oil, steam coal, oil products etc. Agriculture product is engaged in activities related to storage, handling and processing of wheat, corn, barley, rice, cotton and sugar etc. Ivan Glasenberg is the current Chief Executive Officer of the company.

Key Statistics


Recent Development
On 10^th April 2019,Glencore Plc won a contract worth $520 million to sell coal to Mexico. The company will be providing 4.94 million tonnes of coal to Mexico’s Federal Electricity Commission (CFE) between May to December of this year. About 12 auctions held to supply coal to the CFE plant were won by Glencore.

Financial Results and Review – FY2018 (USD Million)
 

(Source: Annual Report, Company Website)
 
In the financial year ending 31 December 2018, the company’s reported revenue was $219,754 million as compared to $205,476 million for the same period of last year. There was an increase of 6.95 per cent due to an increase in revenue from geographic regions of the Americas, Europe, Asia and Africa whereas Oceania revenue had declined in the current financial year. The company’s Adjusted EBITDA for FY2018 stood at $15,767 million as compared to $14,545 million in FY2017. The Adjusted EBIT increased by 8 per cent to $9,143 million for the FY2018 as compared to $8,459 million in FY 2017. The company’s Income before tax for FY2018 stood at $4,679 million as against $6,921 million for FY2017. The Income for the year stood at $2,616 million in FY2018 as compared to $5,162 million in the FY2017. There was a decline of 49.32 per cent mainly because of an increase in the tax expenses and expenses related to impairment in the current financial year. The tax expenses increased mainly because of currency translation effects. The company’s basic earnings per share stood at US$ 0.24 in FY2018 as compared to US$ 0.41 in FY2017. The company’s diluted earnings per share for FY2018 stood at US$ 0.24 as compared to US$ 0.40 in FY2017.

Financial Ratios


The reported gross margin in FY2018 increased by 0.4 per cent to 4.2 per cent against 3.8 per cent reported last year for the same period. The reported EBITDA margin of 6.4 per cent for the FY2018 stood lower than the industry median of 17.2 per cent. Net margin reported was 1.2 per cent for the financial year 2018, reflecting a decrease of 1.4 per cent when comparedwith last year data. Return on equity for the current financial year stood at 7.1 per cent which was lower than the industry median of 11 per cent. On the liquidity front, Glencore Plc’s current ratio was lower than the industry median of 1.87, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the GLEN Plc’s was 0.77x which was significantly higher as compared to the industry median of 0.41x, reflecting that the company is more leveraged as compared to its peers.  
 
Share Performance 

Daily Chart as at April-10-19, before the market close (Source: Thomson Reuters)
 
On April 10, 2019, at the time of writing (before the market close, at 11:55 am GMT), Glencore Plc shares were trading at GBX 331.65, up by 0.39 per cent against its previous day closing price. Stock's 52 weeks High and Low are GBX 409.80/GBX 268.35. At the time of writing, the share was trading 19.07 per cent lower than its 52w High and 23.59 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 37,014,483.60; 30 days – 33,465,075.83 and 90 days – 36,601,106.60. The average traded volume for 5 days was up by 10.61 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.99, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £45.73 billion with a dividend yield of 4.64 per cent.

Valuation Methodology
 
Method 1: EV/Sales Multiple Approach (NTM) 
 


To compare Glencore Plc with its peers, EV/Sales multiple has been used. The peers are ArcelorMittal Sa (NTM EV/Sales was 0.47), Outokumpu Oyj (NTM EV/Sales was 0.41), Aperam SA (NTM EV/Sales was 0.51) and Nyrstar NV (NTM EV/Sales was 0.32). The median of EV/Sales (NTM) of the company’s peers was 0.44x (approx.)

Method 2: Price to Book Value Approach (NTM)

*All forecasted figures and Peers information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.7644 GBP

Risks Assessment
Some of the metal inventories like copper is reaching to its near-historical lows on the exchange.Generally, the market remains positive but is hampered by alumina basis risk impact and a challenging cobalt market in H2 for the financial year 2019.

Conclusion
The company has shown good top-line performance in the current financial year. But coming to bottom-line performance company’s profit went down significantly. The main reason for the decline was because of alumina basic risk impact and challenges coming from the cobalt market. These seems to be temporary reasons that are not expected to last long. The company is already on track as it has won all 12 auctions to sell coal to Mexico. The company restarts its Katanga’s processing operations and zinc mining at Lady Loretta (Mount Isa) and post-acquisition, HVO and Hail Creek contributed positively for the company. In H1 FY18, the commodity prices were generally strong but H2 of 2018 was lower which was still well above H1 of 2016 lows. Glencore share price is also inching towards 52w high, while there are more possibilities for future growth and surge in the price level. Based on strong fundamental prospects and support from valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 330.35 (as on 9th April 2019) with high single-digit upside potential based on 0.44x NTM EV/Sales Value (approx.) on FY19E sales and 1.3x NTM Price to Book Value (approx.) on FY19E book value per share.
 
*The buy recommendation is valid for the current price as covered in the report (as on April-10-19).

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