Rapid rebounds in demand and commodities prices have provided a fair wind over the past 18 months for Glencore, which has unveiled a sharp rebound in pre-tax income to $7.4 billion and funds from operations that were more than double the previous year.
That, in turn, boiled down to a sugar hit for investors in the form of another boost to the dividend. The base dividend was raised to 26 cents a share, more than double the figure the year before, when the Anglo-Swiss mining and commodities group sank to a $2.6 billion loss.
At about $6 billion, net debt is below the range targeted by management, which means that a $550 million share buyback is on the cards before the release of interim results in August, to return debt to the company’s $10 billion optimal cap, equating to four cents a share.
More importantly, commodities prices are expected to remain elevated this year, which should provide a fillip for free cashflow and more special returns. Analysts at Jefferies have forecast a base return of 28 cents a share in respect of this year.
Yet while the shares have risen by more than 50 per cent over the past 12 months to an almost ten-year high, an enterprise value of around 4.8 times forecast ebitda (earnings before interest, tax, depreciation and amortisation) is towards the bottom of the range recorded over the past decade and is barely above the trough recorded in March 2020. So why is the market so pessimistic?
Glencore’s decision to hang on to its thermal coal operations, which it plans to run down over the next 30 years, is one culprit, proving problematic for institutional investors increasingly conscious of environmental, social and governance considerations within their mandates. Glencore wants the best of both worlds. It has trumpeted its role in producing metals vital for the decarbonisation push, including the copper used in renewable energy generation and cobalt and nickel necessary for the manufacture of electric cars. That positions it better for the shift towards greener trends than its leading iron ore mining peers on the London stock market, according to RBC Capital.
But then again, coalmining has provided a huge boost to the bottom line as funding for new mines is less forthcoming and with the Indonesian ban on coal exports remaining in place, which has constrained supply while Chinese demand shows no signs of slowing. Ebitda from coalmining rose more than threefold last year to $5.2 billion, or just under a quarter of the group total, as the average price of Newcastle thermal coal more than doubled. Thermal coal prices are set to rise even higher this year, according to Glencore’s projections.
A sale or spinning off of Viterra, its coal and agricultural business, are potential avenues for unlocking value, Jefferies reckons. The value of the latter business has not been reflected adequately in the share price, Gary Nagle, Glencore’s chief executive, believes, although he has refused to be drawn on whether the business was included in the 13 assets that are under internal review.
The spectre of regulatory investigations isn’t removed, either. Provisions taken this year do not include outstanding Swiss and Dutch inquiries and there’s always the chance that the $1.5 billion set aside for American, Brazilian and British investigations is insufficient. In addition, some heat is forecast to come out of prices after this year, RBC forecasts, as supply improves.
Cash returns will remain liberal in the short term, but exposure to coal means that Glencore could face more battles to gain a more generous valuation from investors in the medium term.
ADVICE Hold
WHY The shares offer a generous dividend and there is a good chance of more share buybacks
Plus500
Investors in Plus500 will take nothing less than exceptional growth, so even though a comedown was inevitable as stock market volatility eased last year, they reacted with disdain to annual results published yesterday.
The listed spread-betting specialist reported a decline in new customer numbers of around a third — and though it might point to active client numbers that, at just over 407,000, were more than double the 2019 level, the payback was lower as average revenue per customer declined marginally on the pre-pandemic level.
The shares, which ended the day down about 4 per cent, have gone sideways this year as investors have braced for a decline in trading from the exceptional levels of 2020. But an enterprise value of just over five times forecast earnings before interest, taxes and other charges does not leave the shares looking exactly cheap, either. That multiple is above the group’s own five-year average multiple and is broadly in line with IG Group, a rival that might not gain new customers at the same whizzy rate but does have a better record of hanging on to those it acquires.
The decline in selling and marketing expenses was not as great in magnitude as the 18 per cent fall in trading income, which amplified the decline in profitability. Avenues of spending included product development, online marketing and trading platforms. Plus500 needs to keep the customers coming because while the churn rate was down on the 2019 level, it remained characteristically high at just over 51 per cent.
There should be some reassurance for shareholders from generous cash returns, which totalled just over $1.19 a share in dividends and $80.2 million in share buybacks for last year, in line with a strategy to return at least 50 per cent of net profits to shareholders.
Next year’s dividend is forecast to decline to 94 cents a share, which equates to a potential yield of roughly 4.9 per cent, versus a potential yield of 6.5 per cent for IG’s shares, based upon dividend forecasts for the next financial year. The latter might not account for potential share buybacks, but it does seem more reliable.
ADVICE Avoid
WHY Not attractively priced as trading returns to normal
