Rio Tinto PLC

Rio Tinto PLC (LON: RIO) is a FTSE 100 index listed, Metals and Mining Company, which produces Iron Ore, Copper, Borates, Aluminum, Diamond, Salt and Titanium.

Next Event: The Q4 FY21’s quarterly operations review is due on 18 January 2022.

Rationale for Valuation – BUY at GBX 4,369.50

• Strategic Progress: It continued to deliver progress against its four pillars - generate attractive returns to shareholders, make a broader contribution to society, growing portfolio, and make Rio Tinto even stronger.
• Guidance: For FY21, RIO has unveiled clear production guidance following the operational resilience shown in Q3 FY21.
• Demand Outlook: As demand for electric vehicles are soaring globally, demand for battery metal shall support the pricing environment.
• Technical Indicator: From a technical standpoint, 14-day RSI (~33.94) is in the oversold position, while the stock price is close to the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis, valuation metrics – EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite undervalued against the Metals & Mining industry.

Key Risks

• Inflation: British inflation topped 10-year high in October 2021 due to skyrocketed energy bills and supply chain snags, which can compel the Bank of England to raise interest rates.
• Commodity Price Volatility: The volatile demand and supply can affect commodity prices can impact profitability. Moreover, geopolitical issues can exacerbate the risk arising from exchange rate fluctuations.

Recent News

Purchase of Tender Offer: On 4 November 2021, Rio Tinto announced tender offer worth US$759,948,000 regarding all its outstanding 3.750 per cent Notes due 2025.

Q3 FY21 Production Update (for the quarter ended 30 September 2021, as on 15 October 2021)

 (Source: Company Website)

• Solid Financials: During H1 FY21, RIO reported robust financial results and declared a total interim dividend of 561 US cents per share, representing 75% of underlying earnings.
• Production: During Q3 FY21, RIO reported production improvements despite the ongoing COVID-19 challenges.
• Operational Safety: All injury frequency rate stood around 0.37, reflecting an improvement against the prior quarter.

Share Price Chart

(Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion 

Despite the operational challenges, the Company maintained strong financial results with a significant spike in metal prices. Moreover, it has reduced its net debt with strong free cash flows and thus, recommended a special dividend of US$6.4 billion. Furthermore, RIO has various value-accretive projects in the pipeline with low risk and higher production capabilities. In a nutshell, RIO is in a great position to generate substantial value for its shareholders. The stock made a 52-week High and Low of GBX 6,788.00 and GBX 4,359.50, respectively.

Based on the strong underlying earnings, special dividends, net cash position, favorable metal prices, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Rio Tinto PLC at the current market price of GBX 4,369.50 (as on 18 November 2021, at 8:10 AM GMT) with lower double-digit upside potential based on 5.22x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Vesuvius PLC

FTSE-250 listed Vesuvius PLC (LON: VSVS) provides molten metal flow engineering and technology services. It serves the steel and foundry industries.

Rationale for Valuation – BUY at GBX 465.40

• Economic Recovery: British unemployment rate fell in October 2021 with an increase in payroll numbers. Adjacently, encouraging retail data across the UK and US, can support the hopes of swift economic recovery.
• Bright Prospects: Vesuvius has reinforced its technology leadership, increased penetration of value-creating solutions, captured growth in developing markets, and improved cost margins.
• Increased Confidence in the Outlook: There was a 100% improvement in the interim dividend, reflecting confidence in the optimized manufacturing footprint, new product pipeline, and ongoing R&D investment to generate substantial value for its shareholders.
• Solid Demand: The demand and production for steel across all major market remained robust, except for China. Similarly, foundry’s end-market all remained strong.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings, Price/Book, and Price/Cash Flow valuation multiples of VSVS are undervalued against the median of the Industrials sector.
• Technical Indicator: From a technical standpoint, 14-day RSI (~42.76) is in the oversold position, while the stock price is close to the lower Bollinger Band.

Key Risks

• Macroeconomic Risk: The slowdown in Chinese economy (China’s factory inflation topped 26-year high in October 2021), supply chain snags, acute power shortages, sluggishness in factory activity, and inflationary market conditions can impact the Company's growth prospects.
• Subdued Factory Activity: British factories are witnessing sluggish growth amid soaring costs as they are struggling with supply bottlenecks. Due to freight capacity problems, Companies can also face order cancellation or delays.

Trading Statement (for the period from 1 July to 31 October 2021, as on 11 November 2021)

• Price Increase: In order to offset increase raw-material and freight costs, the Group increase prices.
• Financial Position: Despite interim dividend payment and short-term investments, FY21’s leverage (Net Debt / LTM EBITDA ratio) is expected be in-line with its level of 1.1x.
• Guidance: FY21’s trading profit is expected to be in line with current analyst expectations.

One Year Share Price Chart

   (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion 

The revenue growth to October was in line with expectations despite the weakening of auto end markets. Moreover, the demand dynamics for both steel and foundry end market remained strong. Vesuvius also continued to launch new products since H1 FY21 to gain market share and improve margins. Adjacently, the expansion of Steel Flow Control capacity is progressing well. The stock made a 52-week High and Low of GBX 595.00 and GBX 437.60, respectively.

Based on the strong commercial performance, end markets recovery, incremental selling prices, market share gains, upcoming growth opportunities, and favourable valuation conducted above, we have given a “BUY” stance on Vesuvius PLC at the current market price of GBX 465.40 (as on 18 November 2021, at 8:00 AM GMT), with lower double-digit upside potential based on 16.51x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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