Broker tips: Glencore, Synthomer

Analysts at Barclays reiterated Glencore as their 'top pick' within the European Metals and Mining space.

Despite what they termed the 'darkening skies', they said there were opportunities to be had.

In the case of Glencore, they believed the shares were underpinned by a structural shift towards coal which they believed was being ignored by the market and a spot free cash flow yield of 34%.

They estimated that Glencore shares were discounting a price of $66 per tonne of thermal coal to perpetuity, against a 2027 forward curve on $280 per tonne.

"EU coal equivalent gas price at $525/t gives significant incentive to switch, giving room for prices to run higher into N. hemisphere winter," they said.

"We forecast shareholder returns (divi and buybacks) of 49% of market cap over 2023-24 using our base case forecasts, 50% using forward curves and 57% using spot."

As an aside, BHP, on which the analysts were at 'equalweight' was seen as "relatively cheap" among the large capitalisation diversified miners.

Barclays kept its target price for Glencore at 700.0p.

Analysts at Berenberg upgraded their recommendation for shares of Synthomer from 'hold' to 'buy' on valuation grounds, telling clients that some of the biggest risks were set to ease.

Nonetheless, the trigger for their decision was the announcement on Thursday of covenant relief for the chemicals outfit, whose leverage was expected to reach 3.6 times its earnings before interest, taxes, depreciation and amortisation.

They conceded that a chemicals company trading on a high-teens two-year free cash flow yield "usually" heralded some threat to earnings or financial health.

In the case of Synthomer that risk came from nitrile latex and the downturn in construction and coatings.

Yet in their judgement those were not so much a threat but rather a well-appreciated reality and comparable numbers were expected to become "much easier" in the back half of the year.

"This leaves leverage; we forecast 3.6x net debt/EBITDA in 2022 following the acquisition of Eastman’s resins business earlier in 2022," they said.

"Thursday's announcement of covenant relief removes the main barrier that had prevented us from turning positive on Synthomer."

On their estimates, shares of Synthomer were changing hands on a 2023 price-to-earnings multiple of 6.4, against a long-term average of approximately 10.5.

Hence the upgrade to their recommendation while leaving their target price unchanged at 160.0p.