Business Overview
Glencore Plc (LON: GLEN) is a one of the world’s largest internationally diversified natural resource company which is into production and marketing of commodities. The company operates in the business of minerals, metals such as copper and zinc, crude oil and oil products. The company also involves in coal and agricultural products.

Financial highlights for the period ending 2019

(Source: Annual Report, Company Website)

Adjusted EBITDA stood at $11.6 billion, a decrease of 26% as compared to 2018 data. Marketing earnings tempered the lower contribution from the Industrial segment, the results of which are more exposed to movements in commodity prices. Lower Atlantic steam coal price forecasts contributed to impairments of $2.8 billion being recognised, resulting in a net loss of $404 million for the year. Cash generation stays healthy, supporting $2.6 billion of shareholder returns announced for 2020.

Led by lower commodity prices compared to prior year, the net income attributable to equity holders decreased from $3,408 million in 2018 to a loss of $404 million in 2019 and EPS reduced to negative $0.03 per share.

On 31^st December 2019, the net funding increased by $2,228 million to $34,366 million and net debt (net funding less readily marketable inventories) increased by $2,846 million over the period to $17,556 million. Net debt to adjusted EBITDA stood at 1.51x, an increase of 62% from the previous year (2018: 0.93x).

Share Price Performance

Daily Chart as at March-05-20, before the market closed (Source: Thomson Reuters)

Glencore PLC shares were trading at GBX 189.02 before the market close (at 11:45 AM GMT) on 5^th March 2020 and were down by 2.27% versus the previous day closing price. Stock 52 weeks High and Low are GBX 343.90 /GBX 187.04.  The group’s stock is reflecting the higher volatility as against the benchmark index based on the company’s beta of 1.87.

From the technical standpoint, 14 days relative strength index of the stock was favourable, and prices could rise further from the current trading level.

Valuation Methodology

Currency exchange rate taken for 1 USD = 0.77342 GBP.

Growth Catalysts

(Source: Presentation, Company Website)

The above image tells us about how the demand for electric vehicles is increasing. Significant demand growth in Nickel battery: 50kt in 2010, 200kt in 2019 and expected 500kt in 2025. Nickel in Electric Vehicles estimated at 800kt by 2030. Glencore processed 35kt of recycled material to recover 3kt cobalt and 5kt nickel in 2019. The company is investing over $2 billion, developing the next generation of Canadian nickel sulphide mines while upgrading the metallurgical facilities to supply nickel from the global operations. In the longer term, the company expect copper markets to grow at solid rates. Looking ahead, zinc mine supply is expected to continue, given the current project pipeline.

Conclusion
While oil prices staged a strong recovery at the start of 2019, it started its downward spiral with COVID-19 breakout lately. In the fiscal year 2019, the company’s operational as well as financial performance declined and the production of almost all the commodities reduced due to tough economic conditions. The company also suffered operating setbacks which hampers its margins. However, the company is well-positioned, and the remaining business performance remained robust. The company expected that the commodity market fundamentals would step in the company’s favour and that the varied commodity portfolio would perform a vital role in the transition to a low-carbon economy with international progress. All through continued constructive collaboration, the company stay concentrated on generating sustainable long-term value for all the shareholders. The company is focused on realising the potential of its ramp-up assets and improving its operational efficiencies. Despite subdued 2019 demand, commodity markets remained tightly balanced through the year. With inventory levels drawn down to multi-year lows by year-end, the markets are well-positioned to benefit from key future demand growth trends. Additional nickel and cobalt required to enable 11.5M new electric vehicle sales by 2025. The group has continued the good performance in the upcoming period.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 188.36 (as on 5th March 2020, before the market close at 12:05 PM GMT) with lower double digit upside potential based 5.7x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.).
 
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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