Rio Tinto Plc

Rio Tinto Plc (LON: RIO) is listed on the FTSE 100 index. It is a metals and mining company, which produces Iron Ore, Copper, Borates, Aluminium, Diamond, Salt and Titanium.

On 15 October 2021, RIO would conduct its Q3 FY2021 operations review.

The next dividend of GBX 404.10 per share would be paid on 23 September 2021 (interim-special dividend).

Investment Rationale for Valuation – Buy at GBX 5,639.00

• RIO recently committed USD 2.4 billion to the Jadar lithium-borates project in Serbia.
• In H1 FY2021, RIO’s revenue surged 71% YoY, and net earnings rose 271% YoY.
• On the profitability front, RIO’s net margin since H1 FY2019 outperformed the industry median of 12.8%.
• On the leverage front, RIO’s debt/equity ratio since H1 FY2019 has been lower than the industry median of 0.47x.
• On the liquidity front, RIO’s current ratio in H1 FY2021 outperformed the industry median of 1.80x.
• In the last year, the stock has outperformed the benchmark FTSE 100 index.
• On the technical front, the stock price is sustaining between the middle and lower Bollinger bands, indicating a potential uptick in the stock price in the near term.

Key Risks

• RIO’s mines were hit by Covid-19 restrictions, with potential labour shortages and project delays.
• RIO incurred a USD 1.4 billion cost overrun in a Mongolian copper mine. Any further costs could drastically affect RIO’s margins.
• The volatile demand and supply could affect commodity prices, which may impact RIO’s profitability.

Financial Highlights (for six months ended 30 June 2021 (H1 FY2021), as of 28 July 2021)

(Source: LSE Website)

• Covid-19 induced constrained supply, and solid demand for Rio’s products led to a significant rise in prices. It resulted in revenue in H1 FY2021 surging 71% YoY.
• The solid growth in top-line led to underlying EBITDA rising 118% YoY and net earnings surging 271% YoY in H1 FY2021.
• Driven by the strong earnings, RIO in H1 FY2021 had a free cash flow of USD 10.2 billion.
• This significant free cash flow resulted in USD 3.1 billion of net cash in H1 FY2021 from USD 0.7 billion of net debt in FY2020.

One Year Share Price Chart 

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

There is an improving outlook for the wider economy despite some uncertainty. The management takes confidence from the strong demand for RIO’s products during challenging times and is taking key investment decisions and advancing its ESG agenda. The Company strives to ensure and maintain strong relationships with every customer. Meanwhile, the stock made a 52-week low and high of GBX 4,116.46 and GBX 6,639.74, respectively.

Based on the favourable metal prices, the Company’s decent growth prospects, better profitability, liquidity and leverage position of the Company than the industry, and support from valuation as done using the above method, we have given a “BUY” recommendation on Rio Tinto Plc at the current market price of GBX 5,639.00 (as of 13 August 2021 at 8:40 AM GMT), with a lower double-digit upside potential based on 6.20x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv.

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

*The dividend yield is subject to change as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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