Research notes

We have further updated our assumptions post RIO’s 4Q’CY23 operational result, and ahead of its CY23 earnings result on 21 February. The key changes bring us closer to consensus on H2’CY23 EBITDA after reviewing our second half unit cost assumptions for RIO’s Pilbara, bauxite and aluminium operations. Our target price remains A$128ps and our recommendation remains Hold.

WGN has released a HY24 trading update and FY24 guidance, ahead of their result on 21-Feb. HY24 EBIT of $20.0m was ahead of our expectations of $15.0m, with the full year FY24 guidance of $31.0m-$34.0m beating our expectations of $30m (c.78% EBIT growth on the pcp). WGN’s 1H skew (1H24 $20.0m vs 2HFY $11m-$14m) is principally due to the completion of production of precast concrete tunnel segments for the Sydney Metro project. That said, the forecast 2HFY24 guidance is ahead of the pcp on a like-for-like basis. Given WGN’s return to growth and the strength of the underlying construction markets, we remain on a Speculative Buy, increasing our target price to $1.15/sh.

S32 reported a mixed 2Q24 operational and sales result, trimming FY24 production guidance for Alumar, Mozal and molybdenum (Sierra Gorda). Second half skew on production and lower metal prices have combined for subdued 1H earnings estimates. Importantly, S32 has kept a lid on opex, reaffirming FY24 guidance. Low growth and cratering earnings, but S32 is positioned as an early potential winner from an eventual turnaround in global/China growth. We maintain an Add recommendation with an updated A$4.75ps target price.

Mixed 2Q production has a reasonably neutral impact to our overall views. Slight downgrades to FY24-25 EBITDA reflect trimmed ST NEWC assumptions Acquisition of the BMA assets is progressing strongly, but we’re cautious about dislocations in the ST met coal market and possible implications for dividends. We downgrade to Hold as WHC now trades within 10% of our revised target.

BHP delivered a result that was largely in line with expectations, albeit with BMA trailing while NSWEC surprised on the upside. We expect BHP’s interim dividend to remain at healthier levels than previously feared, with BHP guiding to lower net debt than we had expected for the half of US$12.5-$13.0bn. In great shape but trading near fair value we maintain our Hold recommendation.

We adjust our model ahead of the 1H24 result in February. The adjustments include the debt raisings, capital releases and Distribution Reinvestment Plan during 1H24, as well as updates to macro assumptions (inflation, interest rates, FX). On aggregate, the impacts are minimal save for the timing and size of capital releases vs previous assumptions. 12 month target price lifts 28 cps to $12.66, in line with our DCF-based sum-of-the-parts valuation. The largest driver here is lower assumed forward interest rates (as per market expectations implied in the swap curve) that impact medium-long-term new debt costs upon refinancings and/or drawdown for capex funding. HOLD retained, given c.2% potential TSR (incl. c.4.9% cash yield) at current prices. On a five year investment holding period we estimate an internal rate of return of 6.4% pa.

RIO delivered a healthy 4Q23 operational result that was largely in-line. SP10 (lower grade) iron ore product is likely to remain a feature longer than we originally expected, but the discounts over time have also proven smaller. RIO is in robust shape, but this does appear factored in. We maintain a Hold rating.

At its recent Investor Day, SDR announced that in mid-2024 it is set to launch Version 1 of its new Revenue Management System (RMS) product, Dynamic Revenue Plus (DR+). We explore two potential scenarios for what DR+ could mean for SDR’s revenue, gross profit, unit economics and valuation in FY30. With this report we also make minor revisions to our forecasts reflecting slight adjustments to our FX and OpEx assumptions ahead of SDR’s 2Q24 trading update on 30 January and 1H24 result on 27 February. SDR is currently trading in line with our valuation of A$5.69 per share. However, given we have not included DR+ in our forecasts, we think investors could be getting the potential material upside of DR+ for free. We therefore set our price target at A$6.25 (10% premium to our valuation). ADD maintained.

Since the proposed merger with Chemist Warehouse Group (CWG) was announced in December, the SIG share price has traded well above our previous target price of A$0.85. We have wanted to stay on the front foot and look to build a position. The presentation made on the merged group in December, noted a number of factors which we believe are worth highlighting again and although we have made no changes to our fundamental valuation of A$0.89, we now include a 20% premium to set a new target price of A$1.07. We maintain our Add recommendation and suggest clients look to build a position.

We downgrade our forecasts to reflect trends in monthly APRA data indicating JDO’s loan growth during 1H24 has been below historical levels and our previous assumption. Impact on valuation is less than movement in forecast earnings, as we continue to assume that JDO’s metrics ramp-up towards its at-scale targets (albeit taking longer than previously assumed) which supports its valuation. ADD, $1.39 TP.