Rio Tinto PLC

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

Investment Rationale – SELL at GBX 5,661.00

• Profit Booking: RIO’s stock price has given over 11% return in the last month, and thus, investors can book profit as per their risk-return profile.
• Macroeconomic Uncertainty: As the Federal Meeting has signaled the interest rates hike and monetary policy tightening, it has taken the US Dollar index to a seven-month high. Therefore, the equity market can remain under pressure.
• Technical Indicators: From a technical standpoint, the momentum oscillator 14-day RSI (~67.58) is approaching the overbought zone, while the stock price is hovering close to the upper Bollinger Band.
• Overvalued Multiples: On a forward 12-months basis – EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book multiples are overvalued against the median of the Metals & Mining industry.

Key Risks

• Inflation Concern: British Consumer Price inflation surged to 5.4% in December 2021, putting pressure on the Bank of England to raise interest rates again.
• Commodity Price Volatility: The volatile demand and supply can affect commodity prices. Moreover, geopolitical issues can exacerbate the risk arising from exchange rate fluctuations.

Q4 FY21 Production Update (for the quarter ended 31 December 2021, as on 18 January 2022)

 (Source: Company Website)

• Strong Trading: Rio Tinto witnessed a solid demand for its products despite the challenging operating conditions. Therefore, the production for the commodities was slightly down compared to Q3 FY21.
• Projects Advancements: It progressed on several projects, including the Pilbara replacement mines. It also signed several partnerships to improve operational performance.
• Market Trend: The market dynamics were majorly encouraging throughout FY21 and therefore, the commodity prices were buoyant.

Share Price Chart

 (Data Source: REFINITIV, analysis done by Kalkine Group)

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

Conclusion

RIO’s stock price has given a decent return since our last coverage and given a profit booking opportunity. Moreover, there are concerns related to the margin headwinds, inflationary pressure, monetary policy tightening, and supply chain snags, which can eventually affect the Company’s financials. Therefore, it is prudent to liquidate the position as per the risk-return profile of investors. The stock made a 52-week High and Low of GBX 6,788.00 and GBX 4,354.00, respectively.

Based on the notional gains, reduced production, overbought technical indication, and unfavorable valuation conducted above, we have given a “SELL” recommendation on Rio Tinto PLC at the current market price of GBX 5,661.00 (as of 28 January 2022, at 8:55 AM GMT).  

Admiral Group PLC

FTSE 100 listed Admiral Group PLC (LON: ADM) provides insurance services in the UK, Spain, Italy, and France. It also has a price comparison business in the US.

Investment Rationale – SELL at GBX 3,207.00

• Profit Booking: ADM stock price has given a decent run since our last coverage, and thus, investors can book profit as per their risk-return profile.
• Macroeconomic Uncertainty: As the Federal Meeting has signalled the interest rates hike and monetary policy tightening, it can keep the equity market under pressure.
• Technical Indicators: From a technical standpoint, the momentum oscillator 14-day RSI (~59.57) is approaching the overbought zone, while the stock price is hovering close to the upper Bollinger Band.
• Underperformance Against Index: ADM’s stock price has yielded around 8% in the past year and showing underperformance against the FTSE 100 index.
• Overvalued Multiples: On a forward 12-months basis – EV/Sales. EV/EBITDA, Price/Cash Flow, and Price/Earnings multiples are overvalued against the median of the Financials sector.

Key Risks

• Federal Reserve Meeting: The latest Federal Reserve Meeting indicated an interest rate hike by March 2022. Thus, it may cause a significant decline in Global Equities.
• Market and Credit Risk: The impact of Covid-19 has jolted the economic environment and posing uncertainties related to inflation, premium rates, liquidity position, and supply chain.

Interim Results (for the six months ended 30 June 2021, as on 11 August 2021)

 (Source: Company Website)

• Financial Growth: During H1 FY21, the Group turnover and customer retention increased by 9% and 12% year-on-year, respectively. Subsequently, earnings per share jumped 67% against H1 FY20 to 132.9 pence in H1 FY21.
• Dividend: ADM paid an interim dividend of 115.0 pence (including 27.1 pence of special dividend) on 1 October 2021.

Share Price Chart

 (Data Source: REFINITIV, analysis done by Kalkine Group)

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

Conclusion

ADM’s stock price has given a decent return since our last coverage. Moreover, a softer insurance market, the dented risk appetite of investors, monetary policy tightening, and rising US Dollar can impact the overstrained position of the stock. Also, lower claims frequency and sluggish macroeconomic indicators can affect the Company’s financial performance. Therefore, it is prudent to liquidate the position as per the risk-return profile of investors. The stock made a 52-week High and Low of GBX 3,706.00 and GBX 2,829.00, respectively.

Based on the notional gains, subdued market sentiments, significant downtrend, and unfavorable valuation conducted above, we have given a “SELL” recommendation on Admiral Group PLC at the current market price of GBX 3,207.00 (as of 28 January 2022, at 8:03 AM GMT).  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should bce made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.

Kalkine Media Limited, an affiliate of Kalkine Limited, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.