>>> Glencore - 8.2% - see investec note attached, hearing could be one of the reason of the weakness.
Glencore
Under our base case commodity forecasts, Glencore offers the potential to deliver
meaningful equity appreciation from anticipated FY15E lows, with debt as a
proportion of total value falling from 81% in FY15E to 20% by the end of the
decade, albeit still above the c.10% levels we model for BHP Billiton and Rio Tinto.
Note that for the purposes of this analysis, we have chosen to evaluate Glencore
using the entire debt position, including debt related to trading inventory. If we were
to exclude the latter on the argument that such inventory can readily and quickly be
converted into cash, in line with the company’s treatment, a less extreme picture
emerges.
The spot scenario presents a more worrying picture, with Glencore’s lower-margin
asset base, relative to BHP Billiton and Rio Tinto, resulting in considerably greater
downside to earnings forecasts, and consequently to estimated market
capitalisation under our methodology. Despite the drastic action that management
has announced recently (even assuming all of the measures are successfully
implemented), a spot price scenario results in an almost complete collapse in
forward earnings such that no meaningful estimate of shareholder value can be
derived under our P/E methodology. In effect, debt becomes 100% of EV and the
company is solely working to repay debt obligations.
This aligns closely with our current Hold recommendation for the company given
that we do not see sufficient growth in value to justify any upgrade. Under a spot
scenario, we feel that Glencore may have to undertake further restructuring beyond
the dividend suspension, capital raising and asset sales programs it has already
announced/implemented.