Rio Tinto Plc (LSE: RIO)

Rio Tinto Plc (RIO) is a global metal and mining company that focuses on exploring, mining and processing the Earth's mineral resources. As on November 01, 1973, shares of the company got admitted to the main market of the London Stock Exchange for trading and is a constituent of the FTSE 100 index.

Institutional Shareholding: BlackRock Investment Management (UK) Ltd., Capital Research & Management Co. (Global Investors), The Vanguard Group, Inc., Legal & General Investment Management Ltd. and Aviva Investors Global Services Ltd. are the major institutional shareholders in the company. (Source: Thomson Reuters)

Exploration Update
As on August 01, 2019, the group reported its exploration update related to Winu Project located in the Western Australia. Where it had discovered copper-gold mineralisation. Wide intersections of vein style copper mineralisation associated with gold and silver beneath relatively shallow cover were indicated by the new data provided on twenty-eight reverse circulation (RC) drill holes and fourteen diamond drill holes. The mining group reported that preliminary technical studies have commenced on the project, but sufficient understanding of the mineralised body is not available as the exploration project is still at an early stage.

Interim Result Highlights: H1 FY19

Source: Company presentation (August 01, 2019)

Led by solid growth in Iron ore prices during the period under consideration, the gross revenue of the group was up by 3% against the same period of the corresponding financial year at $21.8bn. However, its revenue was partly offset by 17% Aluminium price deceleration and 11% plunge in the Copper prices on a YoY basis. However, a growth of 36% in the Iron Ore prices during the first half of FY19 allowed the group to offset the impact of the other two metals.

Underlying EBITDA during the H1 FY19 shot up by 11% to $10.3bn on YoY basis, however, excluding the contribution from the coking coal assets divested in 2018, the underlying EBITDA was 19% higher against the underlying EBITDA of H1 FY18, and EBITDA margin excluding divestment of coking coal assets stood at 47% respectively.

Basic earnings per share remained flat over the year at 252.5c, while the underlying earnings per share rose by 19% to record 301.5 cents. The group declared ordinary dividend per share of 151 cents, which amounted to $2.5 billion, and announced a special dividend of 61 cents, which amounted to $1 billion. As a result of $1.0 billion of the ongoing share buy-back and the final and special dividends of $6.8 billion related to last year, net debt of $4.9 billion rose by $5.1 billion in the first half of 2019, while net gearing increased to 10% at 30 June 2019 (31 December 2018: -1%).

Stock Performance
 
Daily price chart (as on September 02, 2019), before the market close. (Source: Thomson Reuters)

In the September 02, 2019 market session, at the time of writing (before the market close at 01:03 PM GMT), shares of the RIO were quoting at GBX 4,182.0 and added 31.0 points or 0.74% against the previous day closing price. In the year-ago period, its shares have touched a high of GBX 4,979.16 and a 52w low of GBX 3,418.91, respectively. At the current trading level, the dividend yield of the company stood at 5.61%, which is very lucrative measure from an income investors point of view.

Valuation Methodology

Conclusion
The Rio Tinto Plc has a well-diversified business model, and the successful operation of the group has enabled it to deliver sector-leading cash returns to shareholders, which is backed by its strong portfolio and balance sheet.

Also, the group's EBITDA margin and Net Margin during the first half of 2019 was substantially higher against the average industry margin of 31.3% and 7.9% respectively. The group’s EBITDA margin and Net Margin during the H1 FY19 was at 47.7% and 14.1% respectively. Also, its Return to the shareholder's equity was 500bps higher at 9.9% respectively.

At the current trading level, after taking support at GBX 3,924.50 in the August 23, 2019 trading session, the share is soaring up and recorded a bullish reversal in the stock price, also, it was quoting above the 20-day EMA and 21-day SMA prices and since August 29, 2019 closing price, the stock started trading above the middle Bollinger band®, which all collectively reflects a bullish trend in the stock and expected to surge up further from the current trading level.

Therefore, based on the above discussion and valuation done using the above methodology, we have given a “Buy” recommendation with single-digit up-side potential at the closing price of GBX 4,149.50 (as on August 30, 2019), based on the 4.3x NTM Peers Median EV/EBITDA multiple (approx.) on FY19E EBITDA (approx.).
 

BHP Group Plc (LSE: BHP)

BHP Group Plc (BHP) is one of the world's renowned resource company. The company is engaged in the operations of extraction and processing of minerals, gas and oil. The company is having an employee base of 62,000, including contractors, mainly in the Americas and Australia.

Institutional Shareholders: Norges Bank Investment Management, The Vanguard Group, Inc., BlackRock Investment Management (UK) Ltd. and Legal & General Investment Management Ltd. are the major institutional investors in the group. (Source: Thomson Reuters)

Financial Highlights- FY19

Source: Company filing 

During the year under consideration, the group's revenue recorded a growth of 2.6% on YoY basis to $44,288m, the increased in revenue was broadly driven by a surge in revenue generated from the sale of copper. Underlying EBITDA from continuous operations during the period remained flat at $23.2 bnagainst the year-ago period. However, margin shrank marginally against the previous financial year to 53%. Return on capital during the year, expanded by 170bps to 16.1% from 14.4% recorded in the year-ago period. Underlying basic EPS surged by 5% to 176.1c/share.

The group's net debt during the year declined substantially by 16% to $9.21bn from $10.93bn recorded at the end of FY18, and this reflects a strong free cash flow of the group. Dividend per share for the FY19 jumped by 13% to 133c/share, respectively.

Stock Performance

Daily price chart (as on September 02, 2019), before the market close. (Source: Thomson Reuters)

In the September 02, 2019 market session, at the time of writing (before the market close at 03:17 PM GMT), shares of the BHP were quoting at GBX 1,767.8 and declined marginally against the previous day closing price. In the year-ago period, its shares have touched a high of GBX 2,078.50 and a 52w low of GBX 1,391.99 respectively. On a YTD basis is up by approximately 12.6% and in the past five trading sessions, the stock was up by approximately 4.4% respectively. At the current trading level, the dividend yield of the company stood at 6.19%, which is very lucrative measure from an income investors point of view.

Valuation Methodology


Conclusion
The company had shown decent financial performance in the current financial year 2019 as compared to the same period of the last year. Both the top-line and the bottom-line performance had improved for the current period. The company had entered FY2020 with strong positive momentum in terms of volume and cost.

The global economy had grown by 3¾ per cent in the calendar year 2018, with both the US economy and the Chinese economy showing growth. The company expect worldwide growth between 3¼ per cent to 3¾ per cent in the calendar year 2019 and will help the company to deliver strong operational performance. The Chinese economy is expected to grow by 6¼ per cent in the calendar year 2019, which will help the company to expand its operations in the Chinese region. The steel production has maintained strong growth in H1 of FY2019 globally. The company is rapidly expanding its operations in the US and China and is offsetting weakness in Japan and Europe.

Based on the decent growth prospects, and supported by valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 1,773 (as on 30th August 2019), based on 6.29x NTM Price/Cash flow per share multiple (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures have been taken from the Thomson Reuters.

*The “Buy” recommendation is also valid for the current price as on September-02-2019.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
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.
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. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. 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 do 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 in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.