12th Aug 2015 10:11
LONDON (Alliance News) - Anglo American is "increasingly likely" to make a substantial cut to its dividend but provides the most medium-term upside compared to its peers from an expected restructuring of the business and a more attractive longer-term commodity portfolio, says UBS.
"We remain cautious on Anglo American, even though the stock has underperformed Rio Tinto [and] BHP Billiton by 18% in 2015 and is now at its lowest level since 2002," says analyst Myles Allsop.
"In our opinion, Anglo offers the most upside potential medium-term from restructuring and has an
attractive later cycle commodity mix [of] platinum group metals and diamonds, though we believe it remains vulnerable due to its financial [and] operational leverage and South Africa exposure," he adds.
Although Anglo American's recent newsflow is "encouraging", Allsop says Anglo American's key commodities (iron ore, diamonds, platinum group metals and coal) will all "remain depressed" in the near-term due to supply growth and weak demand, which he says was bad timing in the current downturn.
"We believe that Anglo's balance sheet is well structured with liquidity good and refinancing limited in 2015 [and] 2016," says Allsop. "Anglo American does not have any covenants, but its subsidiaries, Kumba and Amplats do."
Allsop says Kumba's covenants could become tight if iron ore prices fall below USD40 per tonne, and if overall commodity prices do not improve over the next six to 12 months, he believes the company may be downgraded to "sub-investment grade", with the only possible mitigation being asset sales or further cuts to costs and/or the dividend.
Allsop says the chances of Anglo American cutting its dividend is becoming "increasingly likely", and says he expects the board to "be prudent" in February 2016 and cut the 2015 financial year dividend to USD0.45 per share from USD0.85 per share, reducing annual dividend spend by USD500 million.
"We expect the stock to only outperform when the outlook for platinum group metals and diamond prices improves and management delivers promised restructuring and cuts costs," says Allsop.
UBS reiterates its Neutral rating for Anglo American, but lowers its price target to 800.0 pence from 1,000.0 pence.
Anglo American shares were trading down 2.2% to 758.0 pence per share on Wednesday morning.
By Joshua Warner; [email protected]; @JoshAlliance
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