Reduce Brambles (BXB) | Adding to Rio Tinto (RIO)
Australian Equities Blended Portfolio
We have recently reduced our holdings in Brambles (BXB) in both Blended and Concentrated Portfolios and the proceeds were used to initiate a new position in Rio Tinto (RIO) in the Blended Portfolio. In April, BXB announced the third upgrade in its FY23 outlook, expecting sales revenue to grow 14-15% at constant currency vs initial guidance of 7-10%; and underlying profit to grow 17-19% vs initial guidance of 8-11%. Free cash flow after dividends is expected to be positive vs prior guidance of it to remain an outflow.
We appreciate BXB’s strong price momentum, ability to pass through cost inflation, and its robust balance sheet. However, recognition of BXB’s strong operational performance has now been adequately reflected in its 32% uplift in total return over the last twelve months, compared to ASX200 of 5.4%. It is trading on a forward 12 month EV/EBITDA of 7.7x.
We have added RIO to the portfolio after some decline in the stock price over the second half of April which eliminated its year-to-date gain and also its outperformance of the ASX200. The correction came amid a decline in the iron ore benchmark price, accompanied by slower than expected industrial production growth in China, as its economic recovery has so far been led by consumer spending in retail and services rather than a rebound in property, infrastructure, and manufacturing.
Following completion of the acquisition of Turquoise Hill Resources Ltd for US$3.1b in December 2022, RIO holds a consolidated 66% ownership stake and management of the Oyu Tolgoi (OT) project, with the Mongolian government retaining a 34% interest. Underground mining at Oyu Tolgoi commenced in March following a US$7b expansion project. RIO’s copper production will rise to between 650 and 710 thousand tonnes this year and ultimately 1m tonnes when OT reaches full production of 500,000tpa. Copper is expected to rise from 9% of RIO’s earnings (EBITDA) in 2022 to 25% in 2024. Copper is one of the key commodities in energy transition for its key role in electricity grids, renewable power generation, and electric vehicles. RIO’s OT expansion has been protracted yet is now timely, with copper demand expected to rise by 3.7% per annum through 2035, half of this growth from energy transition.