Tough times for China-leaning Aussie miners.
The client-side problem is evident – Thursday’s session for example captured the dichotomy nicely, thusly:
Chinese inflation data this week shows a Chinese economy unable to break the shackles of a deflationary vortex, the mixed messages on the stutter-rap bature of the world’s second largest eonomy translates into a mixed day for the big miners.
The hanging on for bad enough news to force Beijing onto a clearer stimulatory path appears to be an unsatisfactory strategy.
In some handy timing, JP Morgan this week completed and released a comparative appraisal of BHP’s (ASX:BHP) and Rio Tinto’s (ASX:RIO) respective iron ore divisions, which comprise ~60% of the valuation for both companies.
The conclusion is BHP ’till 2034 and then jump ship to Rio.
So put that in your calendar.
JPM reckons that from an investment standpoint, there’s not much separating either of the companies, but BHP has underperformed over a six/12-month view and has the edge going forward.
BHP remains JPM’s preference based on:
BHP’s slightly cheaper valuation
BHP presents marginally cheaper than RIO with a Price/NPV of 0.84x (RIO at 0.85x), with both stocks on ~11x PE and offering ~6% yield
BHP’s greater copper exposure (~35% vs RIO at ~18% in FY25) is the winning angle for JPM and should provide a slightly stronger tailwind from a share price perspective
BHP vs RIO (YTD)
Via Google
Here’s the espresso version of JPM’s comparative drill down:
Over the next 10 years, BHP produces higher EBITDA per ton based on ~$4-5/t lower operating expenditure and $1-3/t higher revenue
Both are operating the businesses reliably, but RIO’s depletion replacement spend is materially higher over the next decade
Unit costs also favour BHP near term, which are about $4-5/t lower – again RIO catches up longer term
BHP generates ~$18bn more cumulative Free Cash Flow to 2034, before it equalises long term, post RIO bringing on its depletion replacement mines along with Rhodes Ridge
BHP is set to report higher WAIO (West Australian Iron Ore) NPAT than RIO, with their Net Present Value (NPV) for BHP’s WAIO operations ~13% higher
Long term, they model RIO and BHP production at 360Mtpa and 330Mtpa respectively, and FCF per ton narrowing to $4 (in favour of BHP)
On the operational front, RIO’s performance has notably improved over the last few years, JPM notes, but says RIO will need to continue to shell out heavily through the current investment phase to replace mine depletion which JPM calculates is happening at circa ~5% per annum.
BHP vs RIO (12 months)
Via Google
Rio Tinto (ASX:RIO): Morgan Stanley Retains at Overweight
Price Target is $137.50
Consensus view: Attractive
Rio Consensus PT: $128.083
That all said, on Tuesday the other Morgans (Stanley) maintained an Overweight Recommendation on Rio after it went big from Japan in Gladstone and snapped up Mitsubishi Corp’s 11.65% interest in the Boyne aluminium smelter in that part of Qld.
The announcement follows Rio’s recent acquisition of Sumitomo Chemical Company’s 2.46% stake.
Morgan Stanley’s investment thesis holds, as does Rio’s commitment to aluminium as a long-term player which could benefit from forward looking demand for the metal, especially through its low-cost/low-carbon Canadian interests.
Codan (ASX:CDA): UBS initiate with a Buy
Price Target is $13.10
CDA Consensus: Hold
Consensus Price Target: $11.62
Codan is an Australian manufacturer and supplier of communications, metal detection and mining technology. Founded in 1959, the company listed on the ASX in 2003. Its core clientele are gold prospectors in Africa, communications solutions for government, NGOs, and consumers globally.
UBS forecasts a 28% three-year cash EPS compound annual growth rate, supported by an annual 150bps EBIT margin expansion in the Communication division and 10-15% organic revenue growth.
Over the last three years, management has invested big time into its Communications fixed cost base via sales & marketing and increasing the headcount within Product Development, explains the analyst.
The Communication division represents ~60% of group earnings (was 10%) and can be broken into 3 main areas:
1. Domo Tactical Communications (DTC): Provides wireless Communication systems to military, special services, and law enforcement. DTC’s products are purpose-built transmitters, radios, videos that enable uninterrupted and heavily encrypted communications. The division is exposed to developed economies’ Defence budgets and general global conflict. There are tailwinds to this business given current global geopolitical conditions.
2. Domo Broadband: Broadcasting solutions such as transmitters, receivers, encoders, decoders that enable low-latency video/audio streaming through wireless cameras. These products are used for sports, cinema, and general events broadcasting. Domo has a solid legacy presence in Europe.
3. Zetron: IP protected portfolio of software & hardware products for Command & Control centres. The software element enables control room personnel to receive and log emergency/incident calls and then coordinate an appropriate response with emergency teams such as ambulances, fire stations, police etc.
Zetron has a decent position in North America; the good news being ye olde Motorola Solutions is its key competitor in the States.
Codan’s other main business is metal detection selling into both recreational and military markets
The business has had a very similar trajectory and strategy to that of Imdex (ASX:IMD) and ALS (ASX:ALQ) in terms of the track record of customer upsell to higher value products alongside greater levels of product investment vs. competitors, which has driven long-term market share wins.
CDA also boasts a handy position selling into African miners. There’s significant volatility to this revenue stream, UBS notes, although it now only represents ~5% of group revenue vs. prior peak levels of ~40%.
This business mix segue from over two-thirds metal detection as recently FY21 to 60% Communication, has created more predictable and resilient cash-backed earnings, the broker says.
A robust balance sheet and a fresh pocket of circa $150m (debt facility) add ballast and flexibility for valuation accretive M&A, in the broker’s view.
CDA’s share price has also re-rated significantly over the last 12 months.
CDA (YTD)
The stock is now trading at a one-year forward P/E of 20x vs. the ~11-12x P/E Codan was trading at ~12 months ago.
CDA (12 months)
UBS think this reflects the greater growth prospects of the Codan business especially from the higher multiple Communications segment.
Nonetheless, UBS’ thesis is underpinned by the strong three-year EPS growth of 28% p.a., which drives an attractive 0.7x PEG Ratio (Price to Earnings/EPS Growth) vs. the ASX Small Ords ~2x.
This earnings growth is largely underpinned by ~150bps p.a. EBIT margin expansion in the Communication division, towards company targets of >30% (vs. 25% in FY23), alongside continued delivery of 10-15% organic revenue growth.
Codan’s robust balance sheet (0.4x Leverage) and new $150m debt facility also provides support for accretive M&A (it’s worth noting that in deriving their $13.10 price target, UBS has added $1.20 for potential M&A).
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