GLENCORE (OP, TP GBp235,0): Glencore has underperformed by c30% in the past 4 weeks alone.
In an outright commodity price collapse nothing can be ruled out and there is no denying the company has more debt than it would like in the crt pricing environment. We think a company that generates annualised FCF pre dividend of c$4bn (FCF yield of 14%) with a BBB credit rating has more time and options than the market is giving credit for. Communication from the company has been less than perfect, but on the assumption that prices do not get materially worse (or better) and the market receives a clearer path to debt reductions we see a 30-60% re-rating opportunity. At spot prices the company is trading on an implied industrial EV/EBITDA 2016 of 5x and FCF
yield of 14% vs peers on c7.5x and 5%; a return to peer multiples (where it traded pre Q315) would imply 60% upside. A more modest re-rating (to a 15-20% discount) would imply 30% upside.