Shares in struggling miner Anglo American (LSE: AAL) have risen by 60% over the last month. Today’s full-year results triggered further early gains, but the shares have gradually slipped back and are currently down 6% at 365p.
The results themselves were broadly as expected. Underlying operating profit was down 55% to $2.2bn. Adjusted earnings per share of $0.64 were marginally ahead of forecasts for $0.63 per share, and net debt was almost unchanged at $12.9bn.
Anglo’s dividend will be suspended until the firm’s debt levels have come down. The firm then plans to move to a payout ratio dividend policy. This means that Anglo will pay out a fixed proportion of profits each year, rather than trying to continually increase the dividend regardless of profits.
Big changes ahead
Anglo’s ambitious restructuring plan did contain a few surprises. The group has increased its target for asset disposals from $4bn to between $5bn and $6bn. After agreeing $2bn of asset sales in 2015, Anglo is targeting asset sales of $3bn to $4bn in 2016.
The group also expects to increase operating profit by $1.9bn in 2016, through further cost-cutting and efficiency gains.
Anglo believes that this combination of measures will enable it to generate free cash flow and reduce net debt to around $10bn in 2016.
Is Anglo a buy?
Anglo hopes to reduce its portfolio from 55 assets to just 16. The group’s aim is to focus on a core of high quality assets in diamonds, platinum and copper, all of which would be profitable even at current commodity prices.
The plan seems logical, but the difficult part will be executing it. Today’s share price volatility suggests to me that heavyweight investors have mixed views on whether Anglo’s asset disposal targets are realistic.
I intend to continue holding, but I’m painfully aware that if Anglo fails to raise the cash it needs from disposals, the group may be forced to ask shareholders for fresh cash.
Better off at Spectris?
Another company that issued results today was FTSE 250 engineering firm Spectris (LSE: SXS), which makes measuring and control instruments.
Shares in Spectris rose by 6% following today’s results, which showed that the group’s adjusted operating profit fell by 9% to £181m, while adjusted earnings per share fell by 8% to 114p. The full-year dividend was increased by 6% to 49.5p.
The results were in line with expectations and suggest to me that the firm’s restructuring and recent acquisitions are working well. The firm’s 12% operating margin seems to indicate that Spectris products enjoy a reasonable competitive advantage.
The balance sheet is also strong. Net debt of £98.6m is less than last year’s net profit of £113.8m. I find that comparing debt levels to profits gives a useful indicator of how indebted a firm really is. In this case, it’s clear that Spectris’s debt levels are low and aren’t a concern.
Indeed, I’m tempted to rate Spectris as a medium-term buy. Although the shares’ forecast P/E of 14 isn’t obviously cheap, Spectris has a strong balance sheet and a 3.5% forecast dividend yield that’s backed by free cash flow.
Buying quality firms like Spectris at a fair price usually results in reasonable returns.
