Dividend commitment in line to weaker in the near term...Net Debt for 2016 could come in above forecast, a modest negative...but sales coming higher, EBITDA for 2017 likely to be higher than consensus, a positive
| GLEN-LSE | Price (30-Nov) 279p | Market Cap £40,205M |
| HOLD |
| PRICE TARGET 250p |
No surprises from today's Investor Update
Glencore (GLEN) this morning announced the framework for a new distribution policy as well as a capital allocation process, on which more detail will be released at noon today (GMT) in the GLEN investor presentation. All in, however, there were no major upside surprises in this release and the new distribution policy structure was in line with our expectations from as far back as late 2015.
Dividend commitment in line to weaker in the near term
The newly set out GLEN dividend policy is good, but the structure is directly in line with our forecasts and short-term commitment slightly weaker than we think GLEN can afford. GLEN has announced a US$1bn dividend for 2017 (in line with CG base, but below our US$1.9bn forecast), so we think GLEN could have gone stronger. From 2018 GLEN has committed to a US$1bn base dividend from Marketing (below CG forecast US$2bn base) and a 25% payout from Industrials free cash (we had forecast a 30% payout). All in, we see the near-term dividend commitment as weaker than anticipated, but the structure in line.
Net Debt for 2016 could come in above forecast, a modest negative
GLEN has also highlighted net debt of US$16.5-17.5bn for 2016 (vs CG at US$14.5bn) which is weaker than our forecast for free cash in 2H16. On our current forecasts, we expect GLEN would at least finish the year at US$15bn of net debt. While we forecast a flat working capital balance for the year 2016, price rises in 2H16 may lead to higher than anticipated working cap outflows in 2H16, possibly US$2bn more than our current forecasts. However, we will have to wait until year end reporting to find out the realised impact.
EBITDA for 2017 likely to be higher than consensus, a positive
GLEN also highlighted illustrative 2017 EBITDA of ~US$14bn vs CG at US$13bn. We are close to the top of consensus on 2017 EBITDA forecasts so this potential figure is not a surprise to us. However, consensus upgrades are likely to follow from this highlight, which we see as a positive for sentiment.
Net Debt/EBITDA maximum signals a potential end to deleveraging
GLEN also announced the completion of the asset disposal program (expected) which we see as good news. A Net Debt to EBITDA maximum of 2x through the cycle was set by GLEN, which to us is signalling: 1) GLEN level of comfort with current net debt levels (in line with CG view) and 2) the potential end to deleveraging from here (in line). To us, this also signals that the company is willing to potentially take Net Debt back up to the US$20bn level (CG max was closer to US$15-17bn) via either acquisition or dividend .
| Tim Huff | Analyst | Canaccord Genuity Limited (UK) | |
| Nick Hatch | Analyst | Canaccord Genuity Limited (UK) | |
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