Tough times for China-leaning Aussie miners.<\/p>\n
The client-side problem is evident \u2013 Thursday\u2019s session for example captured the dichotomy nicely, thusly:<\/p>\n
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\u2019s second largest eonomy translates into a mixed day for the big miners.<\/p>\n
The hanging on for bad enough news to force Beijing onto a clearer stimulatory path appears to be an unsatisfactory strategy.<\/p>\n
In some handy timing, JP Morgan this week completed and released a comparative appraisal of BHP\u2019s (ASX:BHP)<\/strong><\/a> and Rio Tinto\u2019s (ASX:RIO)<\/strong><\/a> respective iron ore divisions, which comprise ~60% of the valuation for both companies.<\/p>\n The conclusion is BHP \u2019till 2034 and then jump ship to Rio.<\/p>\n So put that in your calendar.<\/p>\n JPM reckons that from an investment standpoint, there\u2019s not much separating either of the companies, but BHP has underperformed over a six\/12-month view and has the edge going forward.<\/p>\n BHP remains JPM\u2019s preference based on:<\/strong><\/em><\/p>\n BHP\u2019s slightly cheaper valuation \u00a0<\/p>\n Via Google<\/em><\/p>\n Here\u2019s the espresso version of JPM\u2019s comparative drill down:<\/strong><\/em><\/p>\n 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 On the operational front, RIO\u2019s 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.<\/p>\n \u00a0<\/p>\n Via Google<\/p>\n \u00a0<\/p>\n Price Target is $137.50<\/strong><\/p>\n Consensus view: Attractive<\/strong><\/p>\n Rio Consensus PT: $128.083\u00a0<\/strong><\/p>\n 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\u2019s 11.65% interest in the Boyne aluminium smelter in that part of Qld.<\/p>\n The announcement follows Rio\u2019s recent acquisition of Sumitomo Chemical Company\u2019s 2.46% stake.<\/p>\n Morgan Stanley\u2019s investment thesis holds, as does Rio\u2019s 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.<\/p>\n \u00a0<\/p>\n Price Target is $13.10<\/strong><\/p>\n CDA Consensus: Hold<\/strong><\/p>\n Consensus Price Target: $11.62<\/strong><\/p>\n\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n The Communication division represents ~60% of group earnings (was 10%) and can be broken into 3 main areas:<\/p>\n 1. Domo Tactical Communications (DTC): Provides wireless Communication systems to military, special services, and law enforcement. DTC\u2019s products are purpose-built transmitters, radios, videos that enable uninterrupted and heavily encrypted communications. The division is exposed to developed economies\u2019 Defence budgets and general global conflict. There are tailwinds to this business given current global geopolitical conditions.<\/p>\n 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.<\/p>\n 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.<\/p>\n Zetron has a decent position in North America; the good news being ye olde Motorola Solutions is its key competitor in the States.<\/p>\n Codan\u2019s other main business is metal detection selling into both recreational and military markets<\/p>\n The business has had a very similar trajectory and strategy to that of Imdex (ASX:IMD)<\/strong><\/a> and ALS (ASX:ALQ)<\/strong><\/a> 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.<\/p>\n CDA also boasts a handy position selling into African miners. There\u2019s significant volatility to this revenue stream, UBS notes, although it now only represents ~5% of group revenue vs. prior peak levels of ~40%.<\/p>\n 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.<\/p>\n 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\u2019s view.<\/p>\n CDA\u2019s share price has also re-rated significantly over the last 12 months.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n\n \u00a0<\/p>\n 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.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n\n \u00a0<\/p>\n UBS think this reflects the greater growth prospects of the Codan business especially from the higher multiple Communications segment.<\/p>\n Nonetheless, UBS\u2019 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.<\/p>\n 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.<\/p>\n Codan\u2019s robust balance sheet (0.4x Leverage) and new $150m debt facility also provides support for accretive M&A (it\u2019s worth noting that in deriving their $13.10 price target, UBS has added $1.20 for potential M&A).<\/p>\n <\/span><\/p>\n The post Broking Bad: JP Morgan\u2019s iron curtain falls on BHP and RIO; UBS initiate Codan coverage<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"
\nBHP 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
\nBHP\u2019s 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<\/p>\nBHP vs RIO (YTD)<\/h2>\n
\nBoth are operating the businesses reliably, but RIO\u2019s depletion replacement spend is materially higher over the next decade
\nUnit costs also favour BHP near term, which are about $4-5\/t lower \u2013 again RIO catches up longer term
\nBHP 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
\nBHP is set to report higher WAIO (West Australian Iron Ore) NPAT than RIO, with their Net Present Value (NPV) for BHP\u2019s WAIO operations ~13% higher
\nLong term, they model RIO and BHP production at 360Mtpa and 330Mtpa respectively, and FCF per ton narrowing to $4 (in favour of BHP)<\/p>\nBHP vs RIO (12 months)<\/h2>\n
Rio Tinto (ASX:RIO)<\/strong><\/a>: Morgan Stanley Retains at Overweight\u00a0<\/strong><\/h2>\n
Codan (ASX:CDA)<\/strong><\/a>: UBS initiate with a Buy<\/h2>\n
CDA (YTD)<\/h2>\n
CDA (12 months)<\/h2>\n