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Rio Tinto – BUY
Renaissance Capital
6 February 2019
Metals & Mining
Figure 87: Rio Tinto, $mn (unless otherwise noted) |
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Rio Tinto |
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RIO.LN |
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Market capitalisation, $mn: |
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90,530 |
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Enterprise value, $mn: |
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104,197 |
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Dec-YE |
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2016 |
2017 |
2018E |
2019E |
2020E |
Income statement |
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Revenue |
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35,318 |
41,857 |
42,679 |
43,824 |
43,862 |
Underlying EBITDA |
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13,507 |
18,584 |
18,453 |
19,358 |
17,688 |
Underlying EBIT |
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8,187 |
13,561 |
13,716 |
14,877 |
13,073 |
EBIT |
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7,116 |
14,474 |
13,543 |
14,562 |
12,712 |
Finance items |
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-773 |
-1,658 |
-496 |
-664 |
-553 |
Taxation |
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-1,567 |
-3,965 |
-4,070 |
-4,079 |
-3,496 |
Minority interest in profit |
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-159 |
-89 |
-334 |
-582 |
-527 |
Net profit for the year |
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4,617 |
8,762 |
8,643 |
9,237 |
8,135 |
Underlying earnings |
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5,100 |
8,627 |
8,679 |
9,237 |
8,135 |
Underlying EPS, USc |
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284 |
483 |
504 |
562 |
497 |
Thomson Reuters consensus EPS, USc |
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510 |
479 |
451 |
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DPS declared, USc |
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170 |
290 |
277 |
337 |
298 |
Underlying EBIT |
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7,065 |
10,488 |
10,121 |
12,203 |
9,647 |
Iron ore |
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EBIT margin |
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44% |
52% |
50% |
53% |
46% |
Copper |
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-289 |
297 |
1,243 |
1,262 |
1,577 |
EBIT margin |
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-5% |
4% |
15% |
14% |
16% |
Energy |
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624 |
1,049 |
612 |
9 |
1 |
EBIT margin |
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20% |
32% |
42% |
5% |
5% |
Aluminium |
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1,222 |
2,224 |
2,361 |
1,739 |
2,079 |
EBIT margin |
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13% |
20% |
20% |
16% |
17% |
Minerals |
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256 |
493 |
451 |
571 |
698 |
EBIT margin |
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11% |
19% |
16% |
18% |
19% |
Other operations |
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-691 |
-990 |
-1,073 |
-907 |
-928 |
Underlying EBIT |
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8,187 |
13,561 |
13,716 |
14,877 |
13,073 |
Income statement ratios |
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EBITDA margin |
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38% |
44% |
43% |
44% |
40% |
EBIT margin |
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23% |
32% |
32% |
34% |
30% |
EPS growth |
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14% |
70% |
4% |
12% |
-12% |
Dividend payout ratio |
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60% |
60% |
55% |
60% |
60% |
Input assumptions |
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Iron ore fines (62%Fe, CIF China) $/t |
58 |
71 |
66 |
75 |
67 |
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Copper, USc/lb |
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221 |
280 |
296 |
272 |
289 |
Coking coal, $/t |
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144 |
188 |
206 |
178 |
161 |
Aluminium, $/t |
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1,604 |
1,968 |
2,110 |
1,953 |
2,166 |
$/AUD |
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0.74 |
0.77 |
0.75 |
0.72 |
0.78 |
Required breakeven prices |
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Iron ore, $/t |
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31 |
33 |
30 |
33 |
34 |
Copper, USc/lb |
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240 |
244 |
216 |
197 |
194 |
Aluminium, $/t |
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1,259 |
1,420 |
1,530 |
1,539 |
1,681 |
Sales volumes (RIO's share) |
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Iron ore, mnt |
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281 |
282 |
291 |
301 |
302 |
Copper, kt |
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527 |
455 |
624 |
585 |
639 |
Aluminium, kt |
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3,649 |
3,552 |
3,459 |
3,438 |
3,476 |
Attributable Cu eq volumes, kt |
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6,071 |
5,998 |
6,056 |
6,039 |
6,127 |
Volume growth |
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5.1% |
-1.2% |
1.0% |
-0.3% |
1.5% |
Contribution to FY18E attributable underlying EBITDA |
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Copper |
Diamonds |
Minerals |
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1% |
4% |
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13% |
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Aluminium |
Energy |
Iron ore |
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61% |
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18% |
3% |
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Target Price, GBP: |
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48.0 |
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Share price, GBP: |
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42.3 |
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Potential 12-month return: |
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19.8% |
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Dec-YE |
2016 |
2017 |
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2018E |
2019E |
2020E |
Balance sheet |
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Net operating assets |
54,740 |
55,023 |
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47,737 |
48,869 |
50,278 |
Investments |
577 |
-63 |
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225 |
225 |
225 |
Equity |
39,290 |
44,711 |
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40,485 |
42,697 |
45,601 |
Minority interest |
6,440 |
6,404 |
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6,326 |
6,442 |
6,548 |
Net debt |
9,587 |
3,845 |
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1,151 |
-46 |
-1,646 |
Balance sheet ratios |
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Gearing (net debt/(net debt+equity)) |
19.6% |
7.9% |
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2.8% |
-0.1% |
-3.7% |
Net debt to EBITDA |
0.7x |
0.2x |
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0.1x |
0.0x |
-0.1x |
RoCE |
11.8% |
19.7% |
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20.8% |
23.8% |
20.4% |
RoIC (after tax) |
10.2% |
17.6% |
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11.1% |
17.6% |
15.1% |
RoE |
12.0% |
20.9% |
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20.3% |
22.2% |
18.4% |
Cash flow statement |
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Operating cash flow |
11,872 |
17,007 |
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11,479 |
15,467 |
14,502 |
Capex |
-3,309 |
-4,761 |
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2,450 |
-6,000 |
-6,500 |
Other |
-308 |
-447 |
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626 |
-315 |
-361 |
FCF |
8,255 |
11,799 |
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14,554 |
9,152 |
7,641 |
Equity shareholders' cash |
6,921 |
12,075 |
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13,483 |
8,222 |
6,831 |
Dividends and share buy backs |
-2,725 |
-6,333 |
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-10,789 |
-7,025 |
-5,231 |
Surplus (deficit) cash |
4,196 |
5,742 |
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2,694 |
1,197 |
1,600 |
Cash flow ratios |
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Working capital days |
8 |
8 |
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12 |
12 |
11 |
Cash conversion |
1.4x |
1.4x |
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1.6x |
0.9x |
0.8x |
FCF yield |
11.5% |
13.3% |
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15.0% |
9.4% |
8.0% |
Equity shareholders' yield |
12.4% |
15.3% |
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15.0% |
9.0% |
7.5% |
Capex/EBITDA |
24.5% |
25.6% |
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-13.3% |
31.0% |
36.7% |
Valuation |
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$mn |
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SoTP DCF valuation and calculation of target price |
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GBP/sh |
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Iron ore |
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92,832 |
43.4 |
Energy |
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3,126 |
1.5 |
Aluminium |
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17,098 |
8.0 |
Copper |
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17,589 |
8.2 |
Diamonds |
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166 |
0.1 |
Minerals |
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5,327 |
2.5 |
Exploration and other |
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-14,741 |
-6.9 |
Total enterprise value |
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121,398 |
56.7 |
Net debt as at 31 December 2017 |
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-3,845 |
-1.8 |
Cash used in share buy-backs |
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-5,401 |
-2.5 |
Other investments |
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-63 |
-0.0 |
Minority interest |
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-9,822 |
-4.6 |
Equity value as at 4/2/2019 |
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102,267 |
47.8 |
Rounded to |
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48.0 |
Share price on 1/2/2019 |
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42.3 |
Expected share price return |
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13.5% |
Plus: expected dividend yield |
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6.3% |
Total implied one-year return |
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19.8% |
Share price range, GBP: |
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12-month high on 7/6/2018 |
45.4 |
12-month low on 11/9/2018 |
34.6 |
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Price move since high |
-6.8% |
Price move since low |
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22.3% |
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Calculation of discount rate |
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WACC |
8.8% |
Cost of debt |
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4.5% |
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Risk-free rate |
4.0% |
Tax rate |
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30% |
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Equity risk premium |
5.0% |
After-tax cost of debt |
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3.2% |
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Beta |
1.25 |
Debt weighting |
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20% |
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Cost of equity |
10.3% |
Terminal growth rate |
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2.5% |
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Valuation ratios |
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Dec-YE |
2016 |
2017 |
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2018E |
2019E |
2020E |
P/E multiple |
10.9x |
9.1x |
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10.3x |
9.8x |
11.1x |
Dividend yield |
5.5% |
6.6% |
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5.3% |
6.1% |
5.4% |
EV/EBITDA |
5.3x |
4.8x |
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5.3x |
5.0x |
5.4x |
P/B |
1.4x |
1.8x |
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2.2x |
2.1x |
2.0x |
NAV per share, $ |
21.9 |
25.0 |
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23.5 |
26.0 |
27.9 |
NAV per share, GBP |
16.1 |
19.4 |
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17.6 |
20.2 |
21.2 |
Source: Bloomberg, Thomson Reuters, Company data, Renaissance Capital estimates
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