Overview
Glencore PLC (GLEN) is a Baar, Switzerland-headquartered leading diversified natural resource companies. The company was incorporated in 1974 as a trading company and focused on the marketing of crude oil, oil products, ferrous and non-ferrous metals and minerals, but now the company is engaged in the production and marketing of more than 90 commodities. The company currently has offices in more than 50 countries and has an employee base of 158,000 including contractors. The company operates around 150 assets, including agricultural facilities, oil production assets, mining and metallurgical sites. The group, using its sector knowledge and global supply base, is engaged in the business of production and distribution of minerals and metals, crude oil and oil products, coal and agricultural products. Its shares are listed on the London Stock Exchange (LSE) and on the Johannesburg Stock Exchange.

Key Statistics



Management

Anthony Hayward is the Chairman of the Board; he was appointed to the position in May 2013. The Chief Executive Officer of the group is Ivan Glasenberg.

Segments

The company’s operations are differentiated in three operating segments: Metals and minerals, Energy products, and Agriculture products. Metals and minerals segment includes production and marketing of a wide range of metals and minerals, including smelting, refining, mining, processing and storage. Energy products segment includes thermal coal mines in Australia, Africa and South America, which the group produces and markets to a range of industrial and energy customers. The segments also include oil business, which engages in marketing crude oil, refined products and natural gas. Agriculture products segments include Glencore Agriculture, which leads the market in a range of activities.

Top Shareholders

 
(Source: Thomson Reuters)

Key Financial Highlights (FY 2018, in $m)

 (Source: Company Filings)

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 a rise in revenue from geographic regions of the Americas, Europe, Asia and Africa, while Oceania revenue had declined during the financial year. The company’s adjusted EBITDA and adjusted EBIT increased by 8 per cent to $15,767 million and $9,143 million, respectively. Though the growth was tempered by rising commodity-linked input costs and some overall inflationary cost pressures in the industry, higher average commodity prices in 2018 and volume increase from asset acquisitions and restarts underpinned the growth. The company’s income before tax for FY2018 stood at $4,679 million as against $6,921 million for FY2017. Income for the year declined by 49.32 per cent to $2,616 million in FY2018, because of an increase in the tax expenses and expenses related to the impairment in the current financial year, while significant items reduced net profit attributable to equity holders to $3.4 billion. The company’s basic earnings per share stood at US$0.24 in FY2018 as compared to $0.41 in FY2017, while diluted earnings per share for FY2018 stood at US$0.24 as compared to $0.40 in FY2017.

Key Performance Indicators

Adjusted EBITA and adjusted EBIT, which provide an insight into the company’s overall business performance, were $15.8 billion and $9.1 billion, respectively, and surged by 8 per cent. Net debt increased by $4.5 billion over the year to $14.7 billion, while net funding as at 31 December 2018 increased by $1.1 billion to $32.1 billion.  Reflecting the timing of business acquisition and cash flows, FFO to Net debt reduced from 111.1% in FY17 to 78.8% in FY18. Funds from operations (FFO), which increased by 2% over 2017 to $11.6 billion, reflecting the improved Adjusted EBITDA. The company’s ability to generate shareholder returns is measured by net income attributable to equity shareholders. It was declined to $3.4 billion in 2018 from $5.77 billion in 2017, reflecting the impact of non-cash impairments.

Financial Ratios


(Source: Thomson Reuters)

Ratios Commentary

The company in 2018 reported mixed results on the profitability front. While Gross and EBITDA margin rose, all the other profitability margins declined. Moreover, the margins were lower than the industry median. The company’s liquidity was also lower than the industry; quick ratio rose slightly to 0.59x, while current ratio declined marginally. The opposite direction of both the ratios indicates the share of liquid assets increased during the year. The company is more leveraged than its competitors and took on more debt during the year. The asset turnover ratio is considerably more than the industry, which is commendable given the asset-intensive nature of the business. This indicates that the company is optimally utilising its resources. The ratio of FFO to Net debt was 78.8% compared to 111.1% in 2017, while the ratio of Net debt to Adjusted EBITDA was 0.93 times as compared to 0.70 times in 2017.

Valuation Methodology
Method 1:Price/Earnings Approach (NTM)
 
To compare GLEN with its peers, P/E multiple has been used. The peers are South32 Ltd(NTM P/E was 10.12), Rio Tinto PLC(NTM P/E was 10.70),BHP Group PLC(NTM P/E was 11.17) and Antofagasta PLC(NTM P/E was 14.70). The median of P/E (NTM) of the company’s peers was 10.93x (approx.).

Method 2: EV/Sales Multiple Approach (NTM)

*All forecasted figures and Peer information have been taken from Thomson Reuters.
 
Share Price Commentary

 Daily Chart as at May-22-19, before the market closed (Source: Thomson Reuters)

On May 22, 2019, at the time of writing (before the market closed, at 1:30 pm GMT), GLEN shares were trading at GBX 269.7, down by 1.29 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 409.80/GBX 267.75. At the time of writing, the share was trading 34.18 per cent lower than the 52w High and 0.72 per cent higher than the 52w low. Stock's average traded volume for 5 days was 31,029,955.00; 30 days - 33,724,099.17 and 90 days – 33,367,799.48. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 9.5x, same as the industry’s median. The company's stock beta was 1.97, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £37.67 billion with a dividend yield of 5.75 per cent.

Risks Assessment and Growth Prospects

Being a company highly affected by a change in global growth and sentiment regarding macroeconomic conditions, decreased growth coupled with economic and political uncertainties poses a significant risk for the company. The growing tensions between the US and China have led to Chinese import tariffs on selected agricultural products, in response to tariffs by the US, had a dampening effect on the economic sentiment. Commodity prices are influenced by several external factors and a significant downturn in the price of commodities may result in a decline in cash flow and profitability as business activities are dependent upon prevailing commodity prices. Amongst this backdrop, the fundamentals of the company and the underlying demand in the industry remain strong. Continued growth can be seen in other emerging economies, with strong demand from Electric Vehicles sales. Increased demand for cobalt from electric vehicles manufacturers augurs well for the company, and the production of the metal is rightly suited to meet the demand. Demand across commodities is still solid with falling inventories, leading to an upside pressure on commodity prices. Strengthening in US interest rates, which could hurt the prices of various commodities, has also stopped. 

Conclusion

The company is uniquely diversified by geography, products and activities, as it is a global producer and marketer of a wide range of commodities. The company is successfully able to generate value through the integration of marketing and industrial capabilities. Based on decent prospects and supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 273.25 (as on 21^st May 2019) with high single-digit upside potential based on 10.93x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 0.40x NTM EV/Sales Value (approx.) on FY19E sales (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on May-22-19).

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