Broker snap: Glencore Xstrata downgraded by UBS on price headwinds

17th Sep 2013 09:04

UBS has downgraded its rating for diversified mining giant Glencore Xstrata from 'buy' to 'neutral', raising concerns about the price outlook for the company.The group impressed the market earlier this month at an investor day as it raised its cost cutting and synergy targets (following the merger between Glencore and Xstrata earlier in the year), whilst giving a good outlook for free cash flow and returns to shareholders.As such, UBS has raised its earnings estimates for 2014 and 2015 by 5-7% "to reflect the higher-than-expected cost cutting target, with details appearing credible and management determined". The bank expects earnings per share (EPS) to rise by 38% year-on-year in 2014 as cost savings, foreign exchange and volume growth offset lower copper and thermal coal prices.The target price has been hiked from 330p to 335p.However, after recent outperformance UBS said that "challenging" price headwinds are likely to weigh on the stock and offset the company's self-help actions.The Swiss bank said that the stock is down just 3% since the start of the year after a 32% recovery from its trough in July, and is now trading at a "clear premium to the sector". This is despite consensus estimates for 12-month forward EPS falling 43% due to weaker commodity prices and higher depreciation.UBS said that Glencore Xstrata is trading at 0.84 times net present value (NPV) or 13 times 2014 earnings, compared with Rio Tinto which trades at 0.69 times NPV and eight times earnings."While we are still attracted to GLENX's refreshing strategy and improving free cash flow profile, we expect its valuation to cap performance until the outlook improves for copper/coal prices."The share price was down 2.79% at 332.35p by 09:49 on Tuesday.BC