Macquarie upgrades Rio Tinto after strong first-half results

7th Aug 2015 11:49

(ShareCast News) - Macquarie upgraded Rio Tinto to 'neutral' from 'outperform' and lifted the price target to 3,300p from 3,200p following the company's first-half numbers.It said the results were strong, with underlying earnings 10% better than Macquarie expected, adding that the reduced capital expenditure profile has significantly improved the company's ability to cover its dividend from cash flow.It said cash generation was impressive, with significantly lower capital expenditure resulting in free cash flow generation of $2.0bn, which was 38% higher than Macquarie had anticipated."We still see a shortfall in calendar year 2015, but beyond this year forecast cash flow generation is sufficient to maintain a steadily growing dividend," said the bank.Macquarie said the upgrade brings its rating for Rio in line with BHP Billiton. The bank currently sees total shareholder returns of 30% for BHP and 36% for Rio."Assessing forward earnings multiples Rio looks cheaper than BHP, but BHP does offer a higher yield, which we believe reflects concerns over the company's ability to sustain its progressive dividend," it said.It added that it still prefers BHP's more diversified asset base over Rio's greater reliance on iron-ore and aluminium, however the gap between the two has narrowed, driven by Rio's impressive operating cost and capital reduction programs.At 1224 BST, Rio shares were up 1.7% at 2,618.50p.