Glencore - anyone want a white furry cat?

Glencore (GLEN.L): Ivan Glasenberg’s plan A seemed to be set along the lines of global domination: ‘get a quote, buy Xstrata, along with white furry cat and black leather chair’. He is now beavering away on a less glamorous Plan B: ‘cut capex, trim sails, maintain credit rating, weather commodity price storm’. In the past, Glencore would have weathered cyclical downturns behind closed doors but now the drama is to be played out in the full glare of the quoted stage. These interims, to 30^th June 2015, show the scale of the challenge. Adjusted EBITDA was down 29% to $4.6bn, with eps down 53% at 7c. The dividend has been held at 6c, but with no clues about the second half. The trimming of the sails has resulted in current capital employed falling from $21.3bn to $17.2bn, capex cut from $4.0bn to $3.2bn and net debt trimmed a tad from $30.5bn to $29.6bn, (as working capital has been released). Ivan has been quoted as saying that $27bn of debt is now the next aim. Whilst debt has been controlled, the fall in profits has seen net debt to EBITDA climb from 2.4x to 2.7x, but the group takes comfort from $10.5bn of committed available liquidity at the period end. The EBITDA is split out between Marketing at $1.2bn and Industrial at $3.4bn. They are shooting for full year Marketing EBITDA of $2.5bn-$2.6bn, which leaves a lot to do in the second half in such terrible markets. The path for Industrial EBITDA in the second half is left unguided. Industrial capex is forecast to slow further with a figure of $6bn for 2015 forecast against previous guidance of $6.5bn-$6.8bn, whilst in 2016 a further step down to $5bn is forecast.

Adjusted eps last year were 33c, so 15c may well be the ballpark for this year. At £:$1.56, that is 9.6p. The share price has been smashed, having more than halved over a year and at today’s grim 161p is a PE of 16.8x. If the full year dividend is held at (what would be an uncovered) 18c, then that is 11.54p for a yield of 7.2%. This is where dividend investors roll the dice. If the storm starts to pass, then they may well get that dividend yield and feel chuffed as the share price bounces back. However, right now commodity markets seem completely shot and emerging market currencies and economies are stressed. If the economic outlook at the time of the finals is no better, then paying a large dividend whilst, presumably, cutting back further on capex could seem foolhardy. No doubt there would also be pressure from lenders and credit agencies for the equity holders to share some dividend pain, in return for holding onto the BBB credit rating. Unless you think commodity markets will get much worse, I would not bail out at such a low share price. However, staying put is with the full knowledge that the dividend risk is now high, in my view. (Neil Cumming^, 19^th August 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower