Anglo American PLC

Anglo American PLC (AAL) is headquartered in London and was founded in 1917. Its principal operations include mining, exploring and processing of metal and minerals globally. The group mainly Explore’s metals such as copper, platinum, diamonds, iron, nickel, manganese and thermal coal. The group has mining operations in Africa, the Americas and Australia.

Recent News
On 21^st May 2019, Anglo has announced the fourth cycle value of rough diamond sales for De Beers, amounting to $415 million, down by 29% MoM and 25% by YoY. Following a rebound in the third cycle, the fourth cycle has shown a return to the weaker trends seen at the start of the year. The company states that macro uncertainty and seasonality weighed on demand.

Q1 FY2019 Production Update (as on 25^th April 2019)
The company’s De Beers' diamond production stood at 7.9 million carats, a decrease of 8 per cent as compared to 8.5 million carats in Q1 FY18, due to the reduction in production at Venetia. Copper production surged by 4% to 161,100 tonnes as compared with the previous year same period data, driven by the planned higher grades and strong plant performance. Palladium and Platinum production fell by 5 per cent and 6 per cent to 471,900 ounces and 326,600 ounces respectively. Kumba's iron ore production reduced to 9.5 million tonnes, driven by plant maintenance. Minas-Rio's iron ore production rose by 61 per cent to 4.9 million tonnes as compared with the corresponding period of last year. Metallurgical coal production declined by 25 per cent to 4.2 million tonnes as compared to 5.5 million tonnes in Q1 FY18. Thermal coal export production decreased to 6.6 million tonnes against the 6.8 million tonnes in Q1 FY18, with strong performance over the South African mines, offset by the decline in production at Cerrejón.

Financial Highlights (FY2018, US$ million)

(Source: Annual Report, Company Website)

Driven by an increase in the polished diamonds demand from the US and Chinese retailers in the first half, revenue for the financial year 2018 increased by 5 per cent to $27,610 million. Underlying EBITDA rose by 4 per cent to $9,161 million.The company delivered profit attributable to equity shareholders of $3,549 million in the financial year 2018, representing an increase of 12 per cent in comparison with the last year. The company’s reported Earnings per share for 2018 was $2.80, which was 13 per cent more than 2017 reported earnings per share of $2.48. In FY18, free cash flow stood at $3.2 billion, down by 36 per cent. Driven by disciplined capital allocation which helped to strengthen the balance sheet of the company, net debt reduced by 37 per cent to $2.8 billion in the financial year 2018, while net debt/underlying EBITDA was 0.3x. With the proposed dividend of 51 cents per share, the total dividend per share stood at $1.00.

Share Price Performance

Daily Chart as at June-12-19, after the market closed (Source: Thomson Reuters)

On 12^th June 2019, AAL shares closed at GBX 2,071.50, up by 0.632 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 2,229.50/GBX 1,433.64. The company’s stock beta was 1.5, reflecting higher volatility as compared to the benchmark index.

Valuation Methodology
 

Conclusion
The company has a decent growth prospect as there is a positive economic forecast for the global diamond jewellery business.There is Healthy demand for polished diamonds from the US and Chinese retailers. The company operations had been affected by US-China trade tensions, slower economic growth and stock market volatility. In India, the significant depreciation of the rupee reduced local demand in US dollar terms, which had put an impact on the earning of the company.

The company has a clear asset-led strategy, which has enabled the company to operate a resilient and highly competitive business. The company has been delivering improvements consistently, driven by continued productivity improvements in the underlying operations, which has supported a 12-percentage point increase in mining margin to 42% and placing the company amongst the leaders in the industry.

The company has strengthened its balance sheet by more than $10 billion over three years, due to its commitment to disciplined capital allocation. However, the risk of intensification of US-China trade tensions and economic slowdown has also resulted in lower demand from Chinese consumers and lower trade volume globally. The slowdown in China also poses a significant risk.

Based on the strong fundamental prospects and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 2,071.50 (as on 12th June 2019) with single-digit upside potential based on 9.91x NTM Price/Earnings (approx.) on FY19E EPS (approx.).

Halma Plc (HLMA)

Halma Plc (HLMA) is a UK headquartered company engaged in the operations of manufacturing products that protect and enhance the life quality of people. The company operate on its 4 core values which include Achievement, Innovation, Empowerment and Customer Satisfaction.  The company currently operates around 40 businesses in over 20 countries and Europe, the USA and Asia being the major markets. The company operates around 50 subsidiaries globally. Halma presently has an employee base of 6,341 professionals catering to the needs of its customers from over 160 countries. Halma was founded in the year 1894 in Asia. The company’s operations are divided into four reportable segments being Infrastructure Safety, Environmental & Analysis, Medical and Process Safety.

Financial Highlights – Financial Year 2019 (£, million)

(Source: Annual Report, Company Website)
 
For the financial year ending 31st March 2019, the company’s reported revenue was up by 13 per cent to £1,210.9 million against £1,076.2 million in FY2018. On the constant currency basis, the revenue surged by 10 per cent. The strong growth in revenue was driven by an increase in revenue from all four reportable segments of the company. The revenue from all major geographic regions in which the company operate had grown. The USA and the UK had given robust performance whereas Mainland Europe had reported good growth and performance from the Asia Pacific had also been solid in the current financial year. The group’s operating profit increased by £36.6 million to £217.8 million in FY2019 from £181.2 million in FY2018. The company’s reported PBT (Profit before Tax) increased to £206.7 million in FY2019 from £171.9 million in the financial year 2018. The company’s profit for the year attributable to shareholders stood at £169.8 million in FY2019 versus £154.2 million in FY2018. Total Earnings per Share increased by 10.05 per cent to 44.78 pence in FY2019 against 40.69 pence in FY2018. The total dividend per share increased by 7 per cent from 14.68 pence in FY2018 to 15.71 pence in FY2019. The company’s net debt stood at £181.7 million in FY2019 against £220.3 million in FY2018.

Share Price Performance

Daily Chart as at June-12-19, after the market closed (Source: Thomson Reuters)  

On 12th June 2019, Halma Plc shares closed at GBX 2,004.00, up by 1.14 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 2,004.00/GBX 1,215.00. The outstanding market capitalisation was around £7.63 billion with a dividend yield of 0.79 per cent.

Valuation Methodology


Conclusion
The company had shown decent top-line and bottom-line performance in the current financial year. The company’s operations could be hampered by a recession in the economy and geopolitical changes which will lead to a decline in financial performance. The company’s operations will further be impacted by the uncertainty created over the Brexit as it can disturb the supply chain of the company. With the ongoing trade tensions between the US and China will affect the profitability of the company.

Keeping in mind the weak relative valuation of the company and risk associated, we recommend investors to keep a cautious “Watch” on the stock at the closing price of GBX 2,004.00 (as on 12^th June 2019), while we look for any upcoming catalysts.

*In valuation Methodology, all USD figures have been converted into GBP; USD: GBP - 0.78

*All forecasted figures have been taken from the Thomson Reuters.

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