- Rio Tinto (RIO) plans to return the $3.2bn net proceeds from the sale of its remaining coal assets through a new off-market share buyback.
- The buyback is to be carried out over the remainder of 2018, with RIO planning on acquiring a combined 41.2m in Plc and Ltd shares.
- RIO will trade ex-entitlement on Tuesday 25 September 2018.
- We had already forecast a 2H18 share buyback of US$2.0bn – the additional amount boosts our valuation.
- While the buyback is a positive, we still miss the earnings contribution from the divested coal assets, which has further concentrated RIO's business.
It was interesting to see RIO plug the entire net proceeds from the company's recent coal divestments into a share buyback, with no cash component. RIO will carry out the $3.2bn off-market share buyback over the remainder of 2018, which would see it buy back a combined 41.2m Plc and Ltd shares. Post the buyback RIO has said it will also consider whether to pursue any on-market buyback.
A sizeable buyback. The last day that shares can be purchased to be eligible for the buyback is 24 September. RIO shares will then go ex-entitlement on 25 September. The tender period opens on 9 October and will close on 9 November, with buyback proceeds to be dispatched on 19 November 2018. A draft ruling by the ATO has outlined a capital component of A$9.44, and a fully franked dividend component equal to the difference between the buyback price and A$9.44 per share.
Was exiting coal a good idea?
Not in our view. We struggle with the move to divest coal, which has further concentrated the business while removing a division that is (currently and typically) higher margin relative to its ex-iron ore assets. RIO's group EBITDA margin has declined in recent periods from 56% in 2H17 to a much reduced 43% in 1H18, while resilient coal pricing conditions could have helped offset the group margin decline.
We view the recent share price weakness in Rio Tinto (RIO) as having uncovered attractive value in the large miner, where healthy metal prices could see additional capital management and growth added. The key risk to our call remains ongoing commodity price risk.
After adjusting our estimates for the larger than expected buyback we have increased our valuation and share price target (Morgans clients can login to view). With a Total Shareholder Return back above 10% we have lifted our recommendation from Hold to Add.
Morgans clients can login to view our detailed report and increased share price target for Rio Tinto (RIO). Alternatively, please contact your nearest Morgans office for access.
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