Anglo American PLC – Set to Ramp Up production with Cash Preservatives

Anglo American PLC (LON: AAL) is a FTSE 100 mining Company. The Group was established in 1917 in South Africa, and currently, it employs around 90,000 people worldwide with major operations in in Southern Africa, Australia, South America, and North America.

The Group is expected to report its Q2 production results on 16th July 2020.
 
Recent News
5^th May 2020, The Group announced that it had completed the repair of the ACP (Anglo Converter Plant) Phase B unit and thus, it is ready to resume refined PGM (Platinum Group Metals) production.

Business and Production Update (as on 23^rd April 2020)
 
(Source: Company Website)

The Group affirmed that it had taken several initiatives to curtail the cost in the financial year 2020, such as at least USD 0.5 billion of operating cost reduction and nearly USD 1.0 billion reduction in capital expenditure. Further, the Group reported a strong liquidity position of USD 14.5 billion. Moreover, there is no covenants associated with the revolving credit facility of USD 4.5 billion. However, the Group reduced the diamond production guidance in South Africa by around 7 million carats due to lockdown at De Beers operations. In Q1 FY20, the production of rough diamond was in line with the previous year at 7.8 million carats (merely 1 per cent decline compared to Q1 FY19). Meanwhile, the company had a limited impact of 2 per cent on Q1 production in South Africa, during the start of a COVID-19 lockdown.

Share Price Performance
 
Daily Chart as on 15^th May 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

Anglo American’s shares were trading at GBX 1412.6 on 15^th May 2020 (before the market close at 1.05 PM GMT+1), up by 3.55% against the last day closing price. Stock's 52 weeks High is GBX 2,294.00 and Low is GBX 1,018.20.

Valuation Methodology

*Peer: Ferrexpo PLC, Vale SA, BHP Group PLC and Glencore PLC.

*1 USD = 0.821993 GBP.
 
Valuation Metrics

(Source: LSE)

As on 30^th April 2020, Price/Earnings and EV/EBITDA multiples of the AAL were 7.0x and 3.1x, respectively. The same multiples were lower as compared with the Mining industry. Hence, it is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Catalysts
Ramping up of PGM production is expected with repaired ACP Phase B unit, which would provide stability in production. Moreover, the completion of Sirius Minerals acquisition and its UK Woodsmith polyhalite project should generate synergy in future.

Conclusion
The Group has several accretive projects in the pipeline with low risk and higher production. Most of their sites across the world are operating with appropriate safety measures. Moreover, the Group appears to be resilient with operating and capital expenditure cut in 2020. The Group is expecting USD 0.5 billion in cost savings along with nearly USD 1.5 billion of earning benefits from weaker currency of producers and falling oil prices.

Over the past four 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 the decent prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 1,364.20 (as on 14th May 2020) with single-digit upside potential based 10x Peer NTM Average Price/Earnings (approx.) on FY20E earnings per share (approx.).

RDI REIT PLC – Proactive balance sheet management and disposal programme keeping the Company resilient.

RDI REIT PLC (LON: RDI) is FTSE All-Share property investment company, which manages a portfolio of around GBP 1.3 billion.

Recent News:
3^rd April 2020: The Group shared a COVID-19 update and reported £671.9 million in net debt and a cash balance of £85.0 million, as at 29^th February 2020

Interim Update (for the six months ended 29^th February 2020)

(Source: Company Website)

As on 11^th May 2020, the Group released its six months results and reported a robust operational asset management performance, which put them in place to weather the prevailing challenges. EPRA (European Public Real Estate Association) occupancy stood high at 96.5 per cent in H1 FY20 as compared to 95.9 per cent in H1 FY19. In H1 FY20, Like-for-like net rental income decreased by 1.3% due to lower income from operational assets. Regarding the liquidity, the Group had nearly GBP 85.0 million in cash (at the time of announcement) while the Group has decided to limit capital expenditure to GBP 1.8 million in FY20.

Share Price Performance
 
Daily Chart as on 15^th May 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

RDI’ shares were trading at GBX 53.868 on 15^th May 2020, up by 17.10% (before the market close at 2.13 PM GMT+1) against the last day closing price. Stock's 52 weeks High is GBX 143.22 and Low is GBX 41.55.

Valuation Metrics
 
(Source: LSE)

As on 30^th April 2020, EV/EBITDA, and Price/Book multiples of the RDI were 20.3x, and 0.3x, respectively. The same multiples were lower as compared with the Real Estate Investment Trusts industry. Hence, it is reflecting that the Company is trading at a lower multiple as compared to its peers.

Valuation Metrics


Growth Catalysts
Quality and Diversification of portfolio and strength of the balance sheet makes them a resilient Company. The Company’s assets are focused on locations and sectors with long term positive structural demand.

Conclusion
The Group has made further disposal programme of GBP 49.3 million in H1 FY20 with 2.5 per cent of average premium to the last reported values. The Company has a strong balance sheet and liquidity position with actions taken to mitigate the uncertainties. The Board decided to cancel the interim dividend to preserve liquidity along with cost-cutting measures. The Company has the potential to absorb near-term disruption in cashflow and trading.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 46.00 (as on 14th May 2020) with lower double-digit upside potential based 7.60 Peer Average NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Buy” or “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 15^th May 2020)

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