Broker snap: UBS upgrades Anglo American, risk/reward 'more compelling'

15th Jan 2014 09:18

The investment case for Anglo American is improving after the stock's recent weakness, according to UBS on Wednesday, which upgraded the diversified mining firm from 'neutral' to 'buy'. "Anglo has underperformed the other diversified miners by 18% over the last three months, and, in our opinion, the valuation now looks attractive with the dividend yield at 4.1% and the price-to-net present value ratio at 0.64," the bank said."We see the risk/reward as more compelling with around 10% downside (based on the historic 4.5% yield support level) and around 80% upside (based on 11 times 2016E earnings if management achieve their 15% return on capital employed target)."UBS has raised its target price for the stock from 1,500p to 1,580p.Analysts said that Anglo's commodity mix is becoming more attractive, with an improving demand/supply balance for platinum group metals over the next three years and potential upside in diamond prices.Meanwhile, with around half of the group's earnings per share (EPS) generated in South Africa, it should also see the benefits from a weaker rand, they said."Medium-term, we see potential for more aggressive restructuring given the drive of the new management team and the breadth of Anglo's portfolio."However, UBS did highlight that Anglo is unlikely to be able to grow EPS or free cash flow (FCF) "materially" until 2016, when costs for its Minas-Rio iron-ore project in Brazil begin to fall.The stock was 4.24% higher at 1,316p by 09:50.Despite the upgrade, UBS said it retained its preference for Rio Tinto and BHP Billiton (both rated 'buy'), given that their FCF profiles are more attractive in the near term.In a separate research note on Wednesday, iron ore group Ferrexpo was cut from 'buy' to 'neutral' by UBS "due to the elevated political risk in the Ukraine".BC