Reducing Medibank (MPL) | Buy Rio Tinto (RIO)
Australian Equities Income Portfolio Change
Reduce Medibank (MPL)
We have recently reduced our position in Medibank Private (MPL) and the proceeds were used to initiate a new position in Rio Tinto (RIO).
In early December 2022 we increased the holding in MPL when its share price was adversely impacted by the cybercrime incident. Since then, the stock has rallied strongly, with a total return of 25.7% year-to-date in 2023, compared to the ASX200’s 5.6%. Over the last twelve months, MPL also gained a total return of 21.8% while the ASX 200 rose 4.6%. Given the strong price performance, its valuation now looks relatively full on a forward 12 month EV/EBITDA of 12.3x.
Buy Rio Tinto (RIO)
We have added RIO to the portfolio after a ~9% decline in the stock price over the second half of April eliminated its year-to-date gain and also its outperformance of the ASX200, which it now lags by ~5%. 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.
RIO currently trades on a consensus forecast 2023 free cashflow yield of 8.2% and a dividend yield of 6.5%.