The newspaper headlines suggested that Rio Tinto had delivered a result so poor that the unimaginable had to occur — senior executives would not get their bonuses. But the picture from brokers was very different. They are mostly pretty sure the downs are done with, adding that they were larger than expected. Deutsche’s has a buy and its price target is $101.20:
Rio has delivered a stronger than expected 2011 result with underlying earnings of US$15.6bn ahead of our forecast US$15.4bn. A write-down in aluminium goodwill of c. US$8bn was larger than expected but is non cash and wipes the Alcan slate clean. More importantly management has provided a clear signal on future capital returns by lifting the final dividend to US91c (DBe US95c). Combined with a transparent and compelling growth pipeline and our bullish view on iron ore, we see several value drivers for the company near term. Buy on valuation.
Macquarie is less enthusiastic with a lower price raget of $94, and an outperform rating. But the dividend “boon”, “rocket” call it what you will, is appealing. Hard to see much to enthuse about; looking forward the dividend yields are expected to be below 2%.
As a message, the dividend rocket is fairly direct. Rio Tinto believes current iron ore price levels are broadly sustainable over a multi-year horizon (for what it’s worth, we have voiced similar views for over two years now!). We expect many sections of the Australian market will be particularly pleased with the sharp rebasing of the progressive dividend, probably more so than any six-month extension of the current buyback program would have delivered. In saying that, it is also worth placing the increase in context. The CY11 dividend represents an earnings payout ratio of ~18% and places Rio Tinto on an Australian trailing yield of 1.9%. Over the same period, BHP Billiton has paid out ~29% eps and is on a 12-month trailing yield of 2.7%.
Macquarie has this to say about the aluminium business:
To us, the impairments are of minimal relevance. Our valuation of the Aluminium business (US$22b) still resides significantly below the revised book value of these assets (US$29b) anyway. More noteworthy from our perspective is that at a sub-US$1/lb aluminium price we estimate this business loses +US$700m pa at the bottom line. Rio Tinto’s ability/desire to sell higher-cost assets flagged for divestment looks challenged in such an industry environment. Reasonable questions remain about the allocation of capital to downstream assets within an industry that continues to be surprised by the ongoing growth in Chinese volumes (north-western provinces).
Merrill has a buy, and was reasonably impressed with the result:
Rio reported solid FY results with underlying EBITDA and profit broadly inline with expectations. FY dividend bumped 34% to US$1.45/sh, a big, positive surprise (remember these are “progressive” i.e. they aren’t supposed to go down). Some slight disappointment in the market about there being no increase in buyback. The group still has some headroom here and expects to complete $7 bn through end of March. Growth projects well in hand, on schedule. Write-down well flagged, US$8.9 billion, non-cash, mostly in aluminium (the last of the Alcan fallout). Limited changes to earnings. 2012E EPS –3.1% to US$7.41.
With the forward earnings multiples below 10 times, Rio still looks “cheap”. So the market is really signalling bearishness about commodity prices. Rio is big enough and experienced enough not to have diversification or operation risk, and it has certainly learned its lesson about leverage. Net debt to equity is below 20% and according to Macquarie will fall to 10% in 2012-2013.
Macquarie (13)