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Commodities Trading Ideas & Charts

BHP Unlikely To Sustainably Generate Excess Aggregate Returns From Its Portfolio

Business Strategy and Outlook

BHP is the world’s largest publicly traded mining conglomerate and positioned at the centre of the China boom. The company correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification, relative to its mining peers. Most revenue comes from assets in the relative safe havens of Australia, North America, and Europe. 

BHP produces a range of commodities from oil and gas to nickel, and it is a major producer of iron ore, copper and metallurgical coal. Exposure to conventional oil and gas is likely to end with the proposed spin off and subsequent merger with Woodside. The onshore U.S. shale assets were divested in 2018. Much of the company’s operations are in Australia, particularly the low cost iron ore business. Many of BHP’s assets are located close to key Asian markets, particularly iron ore and metallurgical coal, which provides a modest freight cost advantage relative to peers. Commodity demand is tied to global economic growth, China in particular. China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021. With demand for most products likely to soften with the end of the China boom, and BHP’s fiscal 2021-22 earnings back near the fiscal 2011-12 peak, earnings are anticipated to materially decline, with iron ore the likely key driver.

The good times saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where long-term excess returns are now deemed unlikely. Structurally lower earnings with the demise of the China boom peaks means mid cycle returns on adjusted invested capital are expected, after adding back the impairments and write-downs, to be close to the cost of capital. Ignoring the cumulative impairments and write-downs, returns are forecasted to modestly excess the cost of capital by mid cycle.

Financial Strength

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, net debt/EBITDA is expected to remain below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion.Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet is expected remain strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say 

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces. 
  • The company’s cash flow base is diversified and is less susceptible to the vagaries of the market than single-commodity producers. 
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Company Profile 

BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and metallurgical. The merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole and in 2022 voted to reunify the dual listed structure. Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets were sold in 2018 and the remaining Petroleum assets are likely to be spun off and merged with Woodside.

(Source: MorningStar)

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Commodities Trading Ideas & Charts

Rolls-Royce Holdings reflects Strong Liquidity Position of £7.1bn, including £2.6bn in cash and £4.5bn in undrawn committed facilities

Investment Thesis:

  • Very high barriers to entry and Covid-19 is likely to improve industry structure (consolidation)
  • Consumer pent up demand for travel will return with a vaccine. 
  • Liquidity concerns have been addressed with the GBP5bn recapitalization program.  
  • Ongoing focus on R&D and innovation, which will drive further efficiencies.
  • Cost efficiency program to drive savings to support earnings. 

Key Risks:

  • Covid-19 impacts are deeper and more protracted than expected.
  • The Company fails to hit its near-term guidance. 
  • Defense and Power Systems fails to deliver organic growth. 
  • Economic downturn leading to reduced demand from airlines.  
  • Brexit uncertainty. 
  • Adverse currency movements outside hedging strategies. 
  • Regulatory / litigation risks. 

Key Highlights:

  • Revenue growth of low-to-mid single-digit, supported by a strong order book cover in both Defence and Power Systems and a continuation of gradual improvement in Civil Aerospace, along with an expected increase in spare engine sales, with long-term revenue growth driven by technology and innovation opportunities and rising global demand for sustainable power.
  • Operating profit margin to be broadly unchanged as underlying operational improvement is balanced with increased engineering spend to develop sustainable growth opportunities, with a gradual shift in spend towards New Markets, Defence and Power Systems, with an aim to spend ~75% of R&D investment on lower carbon growth opportunities in the medium term.
  • FCF to be modestly positive, representing a substantial improvement on pcp, despite the concession slips.
  • Balance sheet repair commenced with £2bn in proceeds from disposals (ITP Aero is progressing well and expected to complete in 1H22) together with strong underlying FCF generation to be used to reduce net debt (including leases was up +44.4% over pcp to £5.2bn and excluding leases was up +126.7% over pcp to £3.4bn) with the aim of returning to an investment grade credit profile in the medium term.
  • Strong liquidity position of £7.1bn, including £2.6bn in cash (post payment of €750m bond and the £300m Covid Corporate Financing Facility commercial paper) and £4.5bn in undrawn committed facilities.
  • No dividend payment for the year as some of loan facilities place restrictions and conditions on payments to shareholders, however, the Board will start recommending shareholder payments from FY23.
  • The restructuring program delivered £1.3bn run-rate savings target a year ahead of schedule, reducing the size of Civil Aerospace business by around a third and removing more than 9,000 roles from continuing operations, with focus now on ensuring the benefits are sustained.

Company Description:

Rolls Royce Holdings plc (RR) manufactures aero, marine and industrial gas turbines for civil and military aircraft. The Company designs, constructs, and installs power generation, transmission and distribution systems and equipment for the marine propulsion, oil and gas pumping and defense markets. The Company operates three main segments: (1) Civil Aerospace; (2) Defence Aerospace; and (3) Power Systems.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Pioneer Has No Plans to Deviate Away From Winning Variable Dividend Strategy

Business Strategy and Outlook

Pioneer Natural Resources is one of the largest Permian Basin oil and gas producers overall, and is the largest pure play. It has about 800,000 net acres in the play, all of which is located on the Midland Basin side where it believes it can get the best returns.That gives Pioneer an extensive runway of low-cost drilling opportunities primarily targeting the Wolfcamp A, Wolfcamp B, and Spraberry reservoirs. Like other Permian operators, Pioneer’s production is weighted toward liquids—over 80% of its output is crude oil and natural gas liquids, boosting unit revenue. By focusing on the most productive parts of the Permian, it is able to keep its unit costs well below the peer average. Getting into the basin early also means the firm also enjoys relatively low royalty rates, giving it a further advantage over many of its competitors. Pioneer has expanded fairly rapidly, with annual production growth averaging 10%-15% over the last decade or so. But the company is now prioritizing generous shareholder distributions ahead of further volume expansion. The current plan calls for no more than 5% annual growth while reinvesting much less than 100% of operating cash flows. The remaining surplus will be used to preserve Pioneer’s very impressive balance sheet, and to return cash to shareholders via a part-variable dividend.

Financial Strength

Pioneer’s leverage ratios were uncharacteristically high for much of 2021, owing to two substantial acquisitions (Parsley and DoublePoint). But the firm has been generating substantial free cash since then, and the subsequent divestiture of the Delaware Basin assets that were bundled with these acquisitions improved the firm’s balance sheet even further (with proceeds exceeding $3 billion). As a result, the firm now has one of the strongest balance sheets in the segment, with very low leverage ratios and at strip prices, the firm will reach zero net debt by the end of 2022.After the last reporting period, net debt/EBITDA was around 0.4 times and debt/capital is 23%. Management has mentioned a leverage ratio cap of 0.75 times, but really wants absolute debt to be as low as possible, or zero, so it can capitalize in cyclical downturns by aggressively buying back stock without worrying about the impact on the balance sheet.The firm has around $3 billion in maturities due between now and 2025, all of which can be comfortably funded from cash on hand or from operating cash flows (without compromising the firm’s ability to pay the fixed and variable components of its dividend). It has ample liquidity in reserve, too, with another $1.5 billion available on its undrawn credit facility.

Bulls Say  

  • Pioneer’s low-cost Permian Basin activities are likely to generate substantial free cash flows in the years to come, assuming mid cycle prices ($55/bbl for WTI). 
  • The firm intends to target a 10% total return for shareholders via its base dividend, a variable dividend with a payout of up to 75% of free cash flows, and 5% annual production growth. 
  • Pioneer has a rock-solid balance sheet and is able to generate free cash flows even during periods of very weak commodity prices.

Company Profile

Headquartered in Irving, Texas, Pioneer Natural Resources is an independent oil and gas exploration and production company focusing on the Permian Basin in Texas. At year-end 2021, Pioneer’s proven reserves were 2.2 billion barrels of oil equivalent with net production for the year of 612 mboe per day. Oil and natural gas liquids represented 68% of production

(Source: Morningstar)

  • Relative to the pcp: (1) 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Fortescue Metals (FMG) delivered robust 1H22 results along with Capital Management Initiatives

Investment Thesis 

  • Improving sales mix towards higher grade products should continue to narrow the price discount FMG achieves to the market benchmark Platts 62% CFR Index. 
  • Global stimulus measures – fiscal and monetary policies – are positive for global growth and FMG’s products. 
  • Capital management initiatives – increasing dividends, potential share buybacks given the strength of the balance sheet.
  • Strong cash flow generation.
  • Quality management team.
  • Continues to be on the lower end of the cost curve relative to peers; with ongoing focus on C1 cost reductions should be supportive of earnings.

Key Risks

  • Decline in iron ore prices.
  • Cost blowouts/ production disruptions.
  • Cost out strategy fails to yield results. 
  • Company fails to deliver on adequate capital management initiatives.
  • Potential for regulatory changes.
  • Vale SA supply comes back on market sooner than expected. 
  • Growth projects delayed. 

1H22 Results Highlights   Relative to the pcp: 

  • FMG delivered record half year iron ore shipments of 93.1m tonnes (mt), up +3%. Revenue of US$8.1bn declined -13% per cent on 1H21. Average revenue of US$96/dry metric tonne (dmt) represented a 70% realisation of the average Platts 62% CFR Index (1H22: US$114/dmt, 90% realisation). C1 cost of US$15.28/wet metric tonne (wmt) was up +20% due to price escalation of key input costs, including diesel, other consumables and labour rates, the integration of Eliwana as well as mine plan driven cost escalation. 
  • Underlying EBITDA of US$4.8bn, with an Underlying EBITDA margin of 59% (-28% lower versus 1H21: US$6.6bn, 71% margin). 
  • NPAT of US$2.8bn was -32% lower than pcp. EPS of US$0.90 (A$1.24) was -32% weaker. 
  • Net cashflow from operating activities of US$2.1bn after payment of the FY21 final tax instalment of US$915m. 
  • Capex of US$1.5bn, inclusive of US$589m investment in the Iron Bridge growth project and the Pilbara Energy Connect decarbonisation project. 
  • The Board declared a fully franked interim dividend of A$0.86 per share, down -41% relative to the pcp. It equates to 70% 1H22 NPAT, and is consistent with FMG’s capital allocation framework and stated intent to target the top end of the dividend policy to payout 50 to 80% of full year NPAT. 
  • FMG retained a strong balance sheet with net debt of US$1.7bn at 31 December 2021, inclusive of cash on hand of US$2.9bn. FMG’s credit metrics remain strong with gross debt to last 12 months EBITDA of 0.3x and gross gearing of 23% as at 31 December 2021.

Company Profile

Fortescue Metals Group Ltd (FMG) engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. It owns and operates the Chichester Hub that consists of the Cloudbreak and Christmas Creek mines located in the Chichester Ranges in the Pilbara, Western Australia; and the Solomon Hub comprising the Firetail and Kings Valley mines located in the Hamersley Ranges in the Pilbara, Western Australia. The Company was founded in 2003 and is based in East Perth, Australia.

 (Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

PG&E Investing Heavily in California Energy Policy Projects

Business Strategy and Outlook

PG&E emerged from bankruptcy on July 1, 2020, after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. The new PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest more than $8 billion annually for the next five years, leading to 8% annual growth. California’s core ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. Morningstar analysts expect California regulators to support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizer its economy.

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. 

Financial Strength 

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms.  analysts expect PG&E to maintain investment-grade credit ratings. Morningstar analysts estimate PG&E will invest more than $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should result in minimal new equity and debt needs at least through 2023.Morningstar analysts expect PG&E will be prepared to reinitiate a dividend in 2024 after meeting the terms of its bankruptcy settlement. 

Bulls Says

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities.

Company Profile

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.6 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post bankruptcy reorganization

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

BHP reported strong 1H22 results reflecting strong revenue and earnings growth; With strong balance sheet position

Coal is excavated at the Jim Bridger Mine, owned by energy firm PacifiCorp and the Idaho Power Company, outside Point of the Rocks, Wyoming March 14, 2014. West Virginia mined 120 million tons (109 metric tons) of coal in 2012, second to Wyoming, or about 12 percent of total U.S. production. Kentucky was third with about 9 percent of output, according to the National Mining Association. REUTERS/Jim Urquhart (UNITED STATES - Tags: ENERGY BUSINESS) - RTR3H5NY

Investment Thesis 

  • Based on blended valuation (consisting of DCF, PE-multiple & EV/EBITDA multiple), BHP is trading at fair value but on an attractive dividend yield.
  • Commodities prices especially iron ore prices deteriorate on lower demand from China.
  • Focus on returning excess free cash flow to shareholders in the absence of growth opportunities (hence the solid dividend yield). 
  • Quality assets with competitive cost structure and leading market position.
  • Growth in China outperforms market expectations.
  • Management’s preference for oil and copper in the medium to long-term.
  • Solid balance sheet position.
  • Ongoing focus on productivity gains.

Key Risks

  • Poor execution of corporate strategy.
  • Prolonged impact on demand if coronavirus is not contained.
  • Deterioration in global macro-economic conditions.
  • Deterioration in global iron ore/oil supply & demand equation.
  • Deterioration in commodities’ prices.
  • Production delay or unscheduled site shutdown.
  • Movements in AUD/USD.

1H22 Results Highlights Relative to the pcp: 

  • Earnings and Margins: Attributable profit of US$9.4bn includes an exceptional loss of US$1.2bn (which mainly accounts for Samarco dam failure of US$821m as well as an impairment of US deferred tax assets no longer expected to be recoverable after the Petroleum demerger of US$423m). This was significantly above 1H21 profit of US$3.9bn, which included an exceptional loss of US$2.2bn. Underlying attributable profit of US$10.7bn was much improved from US$6.0bn in the pcp. Profit from operations (continuing operations) of US$14.8bn was up +50%, due to higher sales prices across BHP’s major commodities, near record production at WAIO and higher concentrate sales at Spence, and favourable exchange rate movements; partially offset by impacts of planned maintenance across several assets, expected copper grade decline at Escondida, significant wet weather at Queensland Coal and inflationary pressures, including higher fuel, energy and consumable prices. Total Covid impacts was US$223m (pre-tax) versus US$405m in 1H21. Underlying EBITDA (continuing operations) of US$18.5bn, was up +33%, as margin of 64% improved from 60% in 1H21. Underlying return on capital employed improved to 39.5% from 23.6% in 1H21 (underlying return on capital employed, excluding Petroleum, is ~42.9%). 
  • Costs. BHP’s FY22 unit cost guidance for WAIO and Escondida remains unchanged whilst for Queensland Coal, it was increased, reflecting lower expected volumes for the full year as previously announced. At 1H22, unit costs at WAIO are below guidance and are tracking towards the lower end of the guidance range. WAIO unit costs (C1) excluding third party royalties, were 18% higher at US$14.74 per tonne, driven by higher diesel prices and costs relating to South Flank ramp up. Escondida unit costs were at the top end of the guidance range, driven by planned lower concentrator feed grade. Queensland Coal unit costs are tracking above the revised guidance range as BHP saw lower volumes due to significant wet weather impacts and labour constraints. 
  • Balance Sheet: BHP’s balance sheet remains strong with gearing of 10.0% versus 6.9% in the pcp, and with net debt at US$6.1bn versus US$4.1bn in the pcp. The increase of US$2.0bn in net debt reflects strong free cash flow generation, offset by the record final dividend paid to shareholders in September 2021 of US$10.0bn. Following a review of the net debt target, BHP also revised the range to between US$5-15bn from the previous target range of between US$12-17bn. 
  • Dividends: The Board declared a record interim dividend of US$1.50 per share or US$7.6bn, including an additional US$2.7bn above the minimum payout policy. This equates to 78%. 
  • Capex: Capex of US$3.7bn in 1H22 covers US$1.1bn maintenance expenditure, US$0.1bn minerals exploration and US$0.8bn petroleum expenditure. BHP expects FY22 capital and exploration expenditure of ~US$6.5bn (continuing operations), which is US$0.2bn lower than previous guidance due to favourable exchange rate movements. 

Company Profile

BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.

 (Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Rio Tinto Ltd reported strong FY21 results reflecting strong earnings with strong balance sheet position

Investment Thesis 

  • One of the largest miners in the world with a competitive cost structure.
  • Tier 1 assets globally, which are difficult to replicate. 
  • Highly cash generative assets with attractive free cash flow profile. 
  • Shareholder return focused – ongoing capital management initiatives.  
  • Commodities price surprises on the upside (potential China stimulus to combat Coronavirus impact). 
  • Strong balance sheet position.
  • Electrification and light-weighting trends in automobile industry provide long-term growth runway for aluminium demand.

Key Risks

  • Further deterioration in global macro-economic conditions.
  • Deterioration in global iron ore/aluminium supply & demand equation.
  • Production delay or unscheduled site shutdown.
  • Natural disasters such as Tropical Cyclone Veronica.
  • Unfavourable movements in AUD/USD.
  • Company not achieving its productivity gain targets. 

FY21 Results Highlights. Relative to the pcp: 

  • $25.3bn net cash generated from operating activities was +60% higher than FY20 driven by higher prices for RIO’s key commodities. This flowed through to +88% YoY change in free cash flow of $17.7bn, despite a +19% increase in capex to $7.4bn. 
  •  $21.1bn of net earnings, up +116%, mainly reflecting higher prices, the impact of closure provision increases at Energy Resources of Australia (ERA) and other non-operating sites, $0.5bn of exchange and derivative gains and $0.2bn of impairments. $7.4bn capex was made of $0.6bn of growth capital, $3.3bn of replacement capital and $3.5bn of sustaining capital, funded from internal sources, except for Oyu Tolgoi underground development, which is project finance. 
  • $37.7bn underlying EBITDA was up +58% on a margin of 57%. 
  •  $21.4bn underlying earnings (or underlying EPS of US1,321.1cps) were up +72%. 
  •  RIO retained a strong balance sheet with $1.6bn of net cash at FY21-end, versus net debt of $0.7bn at the start of the year, reflecting the free cash flow of $17.7bn, partly offset by $15.4bn of cash returns to shareholders. 
  •  The Board declared a record $6.7bn final ordinary dividend (or US417cps) and $1.0bn final special dividend (or US62cps). This brings the full-year dividend to $16.8bn, equivalent to US1,040cps and 79% of underlying earnings.

Company Profile

Rio Tinto Limited (RIO) is an international mining company with operations in Australia, Africa, the Americas, Europe and Asia. RIO has interests in mining for aluminium, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock and diamonds. 

  • FY21 Results Highligh

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

ABC reported solid FY21 results and strong balance sheet with focus on cost savings

Investment Thesis

  • Macro conditions remain uncertain in key regions.
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk. 
  • Solid balance sheet position provides some flexibility to the Company to pursue growth. 
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21.

Key Risks

  • Macro conditions remain uncertain in key regions.
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk. 
  • Solid balance sheet position provides some flexibility to the Company to pursue growth. 
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21.

FY21 results summary: Compared to pcp: 

  • Revenue increased +8% to $1,569.2m with increased sales volumes experienced for all products other than lime (as a result of lower Alcoa volumes) and strong cement pricing, partially offset by lower average prices for lime amid pricing resets across key alumina contracts. 
  • EBITDA margin declined -120bps to 17.5% and included Covid-19 impacts and interrupted production, much of which are expected to be non-recurring (non-recurring impacts were $16.2m with management expecting $10.3m of these to be non-recurring, with higher demurrage and pallet costs expected to continue in the short term). 
  • Net finance cost declined -6%, as a result of lower average borrowings which saw interest cover improve +1.1x to 14.4x. 
  • Operating cash flow declined -23.8% to $195.2m, in line with expectations, as pcp benefited from tax refunds. 
  • Capex increased +3% to $140.5m million ($106m million stay-in-business capex + $34.5m for development). 
  • Joint Ventures earnings contribution increased +23.8% to $33.3m, with Sunstate’s contribution improving by +115% driven by strong demand across the southeast Queensland construction sector, ICL increasing earnings contribution by +13% and Mawsons increasing earnings contributions by +23%. 

Capital management

  • Strong balance sheet with liquidity of $453.7m (down -13.6% over pcp) and net debt of $437.4m (up +17.5% over pcp), representing a leverage ratio of 1.6x underlying EBITDA (vs 1.4x in pcp) and gearing of 34.5% (up +400bps over pcp), both well within banking covenants and Board’s capital management target range. 
  •  Return on Funds Employed (ROFE) declined -30bps over pcp to 10.6%, however, remained above cost of capital (normalising for Covid-19 and operational non-recurring costs of $16.2m, ROFE increased to 11.6%), with management expecting long-term ROFE improvement coming from Kwinana Upgrade project cost savings, development of downstream land investments and ongoing cost-out. 
  • The Board declared fully franked final ordinary dividend of 7cps (down -3.45% over pcp), bringing full year total to 12.5cps, up +4.2% over pcp and representing a payout ratio of 68.5% of underlying earnings, within the Board’s target range of 65-75%. 

Cost savings above target

Management remains focused on their cost reduction program, delivering gross savings of $26.1m through operational efficiencies, procurement, and a more simplified organisational structure, equating to net cost out of $13.6m, +36% higher than expected.

Company Profile

Adbri Ltd (ABC) is an Australia listed construction materials and liming producing company. ABC is Australia’s leading (1) lime producer in the minerals processing industry; (2) concrete products producer; and (3) cement and clinker importer. ABC is Australia’s number two cement and clinker supplier to the Australian construction industry and number four concrete and aggregates producer.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

SGM delivered a strong 1H22 driven by higher volumes and selling prices.

Investment Thesis
Improvement in scrap volumes.
Improvement in scrap prices across key regions.
Cloud recycling could add significant earnings over the long run.
Investment in improving scrap quality should improve SGM’s competitive position.
Undemanding valuation relative to its own historical average and ASX200 Industrials Index.
Self-help initiatives to support earnings.
Improving Return on Capital (ROC).
Current on-market share buyback.

Key Risks
Significant downturn in global economy.
Trade war between China and the U.S. escalates.
Weaker scrap prices in key regions.
Lower volumes.
Regulatory changes – particularly around China’s anti-pollution policies.
Cost pressures impacting group margins.

1H22 Results Highlights
North America Metal (NAM) sales revenue of $1,997.2 was up 87.2% driven by higher sales prices and sales volumes (up +11.3%). Intake also improved over the period and returned to pre-Covid levels. Trading margin of $421.6m was up +74.6% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $142.2m was up +478%.
Australia & New Zealand Metal (ANZ) revenue of $815.6m was up +70.5% driven by +72.2% increase in average selling prices. Sales volumes were largely unchanged on pcp. Trading margin of $225m was up +58.8%. Costs were up +12.3% driven by higher contract labour costs to cover staffing shortages and inflationary pressures. Segment EBIT of $94.9m was up +243.8%. Management noted that despite Covid disruptions in Australia and New Zealand, intake volumes showed improvement and recovered to near pre-Covid levels.
UK Metal sales volumes was up +5.8% and average selling prices up +64.4%, leading to sales revenue of $744.4m increasing +73.9%. Management noted that Trading Margin of $115.7m was up +39.6% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $29.4m was up +180% on pcp. Management noted that whilst the intake volumes in 1H22 were consistent with pcp, they remain below pre-Covid levels.
Sims Lifecycle Services reported revenue of $166m (up +9%) and underlying EBIT of $9.9m was up +45.6% driven by +44.4% growth in repurposed units and +9% growth in sales revenue. SA Recycling reported sales volumes growth of +18.6% and underlying EBIT (50% share) growth of +427.5% to $128.7m.

Company Profile
Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

(Source: Banyantree)

General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

AGL Posted Strong 1H22 result with Potential Capital Management and Demerger initiative

Investment Thesis

  • Energy margins bottom out and could potentially start to improve (higher customer and volume numbers). 
  • Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management.
  • On-going focus on costs and digitalization should support margins.
  • Potential capital management initiatives (e.g., buyback).
  • Demerger into AGL Australia and Accel may unlock shareholder value. 
  • Potential favourable changes to the regulatory environment. 
  • Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board. 

Key Risk

  • Competitive pressures leading to margin erosion.
  • Cost pressure and fuel supply issues leads to margin erosion. 
  • Increase in supply leading depressed prices. 
  • Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)]
  • Un-scheduled shutdowns impacting earnings. 

1H22 headline results

  • 1H22 group underlying profit after tax of $194m, was down -41% on pcp or down -23% excluding the non-recurrence of the Loy Yang outage insurance proceeds. In term of AGL Australia, the key drivers of performance were consumer energy margin was down predominantly due to the impact of milder weather on demand, higher cost of energy with increased residential solar volumes, and margin compression from customers switching to lower priced products. Further, supply and trading gas margin was lower as expected, impacted by lower priced legacy supply contracts rolling off, during the 2H21. With respect to Accel Energy, trading and origination electricity margin were lower due to lower contracted electricity prices and lower offtake sales to consumer electricity resulting from increased penetration of solar. Providing some positive offsets to underlying profit was positive movement in centrally managed expenses driven by cost-out initiatives, favourable movement in depreciation due to the asset impairments recognized in FY21 and lower tax expense (reflecting the fall in profit). 
  •  Underlying cash flow from operations was up +8% YoY, driven by a large inflow from margin calls versus an outflow pcp and positive working capital movements, which was able to more than offset the decline in underlying EBITDA
  • FY Q21 Results 
  • 1H22 headline result. C

Company Profile

AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.

(Source: Banyantree)

  • Relative to the pcp: (1) 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.