22 November 2019
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There's some good and bad take aways from this season's results.

Rio results a tad disappointing

Paul Rickard
2 August 2018

Reporting season kicked off yesterday with Rio’s first half result (Rio has a 31 December balance date). Over the next 30 days, about 80% of Australia’s ASX listed companies will update the market with their half year or full year profit results.

With the Australian share market perched near 10 year highs, a good earnings season will be critical to sustaining upward momentum.

The first major company to report, Rio, delivered its results after the close of trading. Expectations were high, and while there was some further positive news about shareholder returns, it was a tad disappointing. Overall, a little mixed.

Rio reported underlying EBITDA of US$9.2bn, up 1.7% on the corresponding half last year, but down 3.6% on the second half of FY17. Underlying earnings for the half came in at US$4.4bn, lower than some broker forecasts of up to US$4.8bn.

                                    Rio by the Half Year (US$)

Although net debt rose to US$5.2bn, Rio maintained a very strong balance sheet with gearing at just 10%. Free cash flow fell to US$2.8bn, in part due to higher capital expenditure and payment of tax for FY17. Shareholders will receive a higher interim dividend of US 127.0 cents, up 15.4% on last year’s 110.0 US cents.

Higher commodity prices, in particular aluminium and copper, and increased volumes drove the small increase in EBITDA, but this was offset by cost headwinds. Rio said that higher energy cost knocked US$0.2bn off the result, while the cost of raw material inputs reduced earnings by US$0.3bn.

The cash unit cost of production in the Pilbara for a tonne of iron ore rose from US$13.00 in the last half of FY17 to US$13.40 in this half.

Rio’s productivity programme also met the cost headwinds, but Rio said that it delivered a net benefit in mine-to-market free cash flow of US$0.3bn in H!1 2018 and was on track to deliver a further SUS0.4bn in the second half.  

Earnings from aluminium and copper benefited from both higher prices and volumes, while iron ore earnings were barely changed as higher volumes were offset by the impact of lower prices. Rio’s average realised price was US$57.90 per wet metric tonne of iron ore compared to US$63.00 in the corresponding half last calendar year.  

Underlying EBITDA by Product

But when compared to the second half of FY17, first half EBITDA from iron ore decreased by 4.5%. On a positive note, Rio said that 2018 shipments of iron ore are expected to be at the upper end of the existing guidance range of 330-340 million tonnes.

Buyback increased

Rio announced that it would undertake a further US$1.0bn on-market buyback of Rio Tinto plc shares by the end of February. This is in addition to the US$1.4bn remaining from an existing on-market buyback programme.

It has also promised to return the post-tax proceeds of its recent asset disposals to shareholders. This is approximately US$4.0bn and includes US$4.15bn from the sale of coking coal assets, US$0.8bn from the sale of European aluminium smelters (Dunkerque and ISAL), less tax of US$1.0bn.

Some of that US$4.0bn might find its way back directly to Australian shareholders through an off-market buyback. This will prove to be very popular for self-funded retires and their super funds and other low rate taxpayers.

Bottom line

Going into the result announcement, the brokers (on consensus) had a target price of $89.44 on Rio, a 9.5% premium to yesterday’s closing price of $81.65. Ord Minnett topped the list at $96.00, with Macquarie at $94.00 and UBS at $93.00.

With costs rising and productivity gains becoming harder to achieve, some downward revision to earnings forecasts and target prices is likely. The prospect of ongoing shareholder returns will provide support and limit any pullback.

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