BUY: Antofagasta (ANTO)
Facing record comparators from 2021, the Chilean miner saw underlying earnings fall and it slashed its dividend in response, writes Alex Hamer.
Following a golden year is never easy. Copper miner Antofagasta has landed an almost $1bn (£830mn) bonus to throw onto its reported profits for the 2022 financial year, but underlying numbers have seen a significant slide on 2021, when copper prices were high and costs low.
For the year ending December 31, the company saw its underlying cash profit fall almost 40 per cent to $2.9bn (£2.4bn) as copper prices fell from 2021 highs and production of copper, gold and molybdenum fell. Net costs also climbed a third on the year before, to $1.61 per pound of copper. Guidance for this year is slightly higher again, at $1.65 per pound, although chief executive Iván Arriagada said input prices were already coming down.
Antofagasta has cut its dividend by half, sticking to its policy of handing back 100 per cent of underlying profits per share. The final payout of 50.5¢ compares with 118.9¢ a year ago.
There were several factors behind the difficult profit numbers, on top of the lower price. Overall production was down 10 per cent to 646,000 tonnes, contributing to almost $1bn of the $1.9bn cash profit fall. The lower prices were responsible for a $644mn reduction in earnings, and mining costs covered the rest of the decline.
Production will not immediately spring back to its 2021 level — guidance for this year is 670,000-710,000 tonnes, compared with 721,000 tonnes in 2021. Antofagasta’s significant capital spending in recent years will start to bear fruit, however. “We see growth coming in the short term and the longer term,” Arriagada said. RBC Capital Markets forecasts a return to previous levels next year.
The $945mn one-off gain is for its stake in a Pakistan copper mine that has spent years in development hell. An arbitration panel awarded Antofagasta and its joint venture partner Barrick Gold $5.8bn in 2019 because Pakistan’s government denied them a mining lease in 2011, but Barrick has held on to its stake (in return for giving up the potential payment), and will develop the mine in partnership with a state body.
Arriagada said the board would consider what to do with the cash once it arrives.
The company is now at the end of a major capex programme, in which it built a desalination plant for the Los Pelambres mine, as well as added processing capacity. But spending is expected to remain around this elevated level for some time. The company forecast $1.9bn in capex for this year, while consensus forecasts put 2024 capital spending at $2.2bn.
The signs are pointing to a stronger copper market this year than initially forecast, given the supply disruptions in Chile and elsewhere. Antofagasta is well placed to capitalise on this, even if the recent share price run means it is one of the most expensive miners at a valuation of 29 times forward earnings.
HOLD: Hays (HAS)
The recruiter started the year with too many consultants and too little work, writes Jemma Slingo.
Recruitment companies were riding high in the aftermath of the pandemic, fuelled by labour shortages, wage inflation and the “Big Quit”. To make the most of booming demand, all the big listed players took on more consultants, confidently declaring that it was “just the beginning of the great reshuffle”.
A few months down the line, however, and the situation has changed. In its half-year results, Hays reported an 8 per cent fall in operating profit to £97mn, in spite of record fees. This was primarily due to high staff costs: the group entered the financial year with headcount up 26 per cent, and like-for-like costs rose by 16 per cent in the period, driven by wages — which had been increased — and consultant commission.
Management said it “actively managed” the situation and reduced headcount in the second quarter in several markets, including in the UK, China and the US. This was achieved through attrition as opposed to redundancies, according to the group.
The next six months should be easier, therefore, and second-half profits are expected to be higher. However, the economic backdrop is still gloomy and the group noted a decline in volume of work. So far, this has been more than offset by wage inflation, as Hays tends to charge a percentage fee per placement, based on employee salary. How long wage inflation will persist remains to be seen, however.
Hays has also announced that chief executive Alistair Cox will be stepping down after 15 years at the helm, which could add to the short-term turbulence.
HOLD: Smith & Nephew (SN.)
The medical device manufacturer has increased its ambition in the hope of shaking its reputation as an underperformer, writes Jennifer Johnson.
There were no nasty surprises lurking in Smith & Nephew’s 2022 results. But nor was there a great deal for investors to celebrate. Revenue was flat — though this had largely been anticipated — and shrinking margins ate into profits. The medical technology group is currently striving to break a pattern of underperformance, with management introducing a 12-point plan for growth last year.
As the group progresses through the two-year life of the plan, chief executive Deepak Nath said it expects “further operational and financial benefits, including a reduction in inventory levels and cash conversion to return to historic levels”. However, short-term success will largely be determined by factors outside of the company’s control.
Trading profit margins shrunk to 17.3 per cent in 2022 — down from 18 per cent the year before. The decline was blamed on inflation in freight and logistics costs, as well as China’s volume-based procurement (VBP) scheme. The programme is designed to lower the cost of medical consumables by tendering large swaths of its medical devices market to the manufacturer that offers the lowest price.
For the 2023 financial year, Smith & Nephew is targeting revenue growth and trading profit margins above last year’s levels. Its 2025 guidance is more bullish still — with management aiming for profit margin expansion to “at least” 20 per cent. According to analysts at UBS, this implies 125 basis points (bp) of margin expansion in each of the next two years.
“The company has only delivered 100bp or more three times since 2006 and those were years immediately post the financial crisis . . . or immediately post Covid,” they wrote in a 21 February note.
Much depends on the group’s ability to turn its key orthopaedics division around. By its own admission, this part of the business has been hobbled by “poor operational systems and commercial execution”. One of the major objectives of the 12-point plan is to regain lost momentum in hip and knee implants.
There is some evidence of progress, with Smith & Nephew reducing its number of overdue orders by 35 per cent from its peak in the first half of last year. Investors are also hoping that some new faces in senior management will help to drive the company’s transformation. Nath is only a year into his tenure, and it was announced this week that former Serco chief executive Rupert Soames will step in as chair.
Shares currently trade at roughly 15 times expected 2024 earnings, making Smith & Nephew a relative bargain in the medical tech field. But with so much uncertainty surrounding its overhaul, we’d say that constitutes fair value.
