■ In this report we focus on Glencore's Agriculture ("Ag") growth ambitions. The right-sizing of the company's debt levels, formation of the 50:50 Ag JV last year and ongoing weakness in Ag trading conditions raises the prospect of industry M&A, in our view. On our analysis, Glencore has the balance sheet to fund a major transaction, increase the dividend payout at the half year and keep net debt within targeted metrics. We do not believe M&A will derail our core investment case and post the recent pull back we reiterate our OUTPERFORM rating.
■ Agriculture landscape: Ag is the smallest of Glencore's three main commodity verticals and the industry is dominated by four long standing companies known as the "ABCD" group. Ag has been a targeted growth area for Glencore ever since its IPO in 2011 and its long term aim is to break into the US market and compete with the largest players. Realistically this would require a major acquisition (or a series of bolt-ons). Ag prices and margins have been on a three year downtrend, potentially making major players more open to transactions. However, given the weak returns history, any potential deal would need to come with a strong synergy/value creation angle.
■ Deal funding capacity over $12bn: The formation of the 50:50 Ag JV last year provides the Ag division with greater financial firepower. By end 2017 we forecast Glencore net debt of $10bn and based on the company's through cycle net debt : EBITDA ceiling of 2x means Glencore has upwards of $6bn of funding capacity which, combined with the JV partners, could potentially provide the Ag division with upwards of $12bn of deal funding capacity.
■ Valuation: We have made minor changes to our estimates following the Q117 production report. Our unchanged 410p target price is based on 2018E target EV/EBITDA multiple of 6.5x and marketing PE of 12x.