Broker snap: Jefferies upbeat about Glencore Xstrata, raises target

11th Sep 2013 09:26

Jefferies has raised its target price for mining group Glencore Xstrata after Tuesday's investor day, the first since the completion of the merger between Glencore and Xstrata back in May.The target price has been raised from 375p to 425p as the broker reiterated its 'buy' rating for the stock.With the integration of Xstrata into Glencore now complete, the company pleased the market by raising its annual synergy guidance for 2014 to at least $2bn, well ahead of the initial guidance of just $500m and market expectations of $1-1.5bn. Management also reduced capital expenditure (capex) guidance for 2013-2015 by $3.5bn, $2.7bn of which relates to the Las Bambas copper project in Peru which is currently for sale.Jefferies said: "Based on our analysis, the incremental synergies and capex savings (excluding Las Bambas) targeted by management have an net present value of $10.8bn, which equates to 16% of the company's current market cap. We are more conservatively modelling annual synergies of $1.5bn, although we will not be surprised if the company's synergy guidance is ultimately increased to around $3bn/year."The broker said that the revised synergy guidance, combined with lower capex forecasts and significant volume growth, should support free cashflow generation for the company in the future. "Glencore remains one of our top picks, especially as we have recently become more positive on the outlook for the sector. We expect volume growth, opex cuts, capex cuts, asset disposals (including possibly $5bn for Las Bambas) and the cyclical resilience of its Marketing business to lead to strong dividend growth and support a premium equity valuation."The stock currently trades at 12.4 times 2014 earnings, a premium to the sector-average multiple of 10.9.The stock was up 2.34% at 336.45p by 09:39 on Wednesday.BC