This is slightly unusual territory for me. I don’t usually tip commodity stocks, as they tend to have little pricing power due to their lack of differentiation. On the other hand, there are occasions when, from a pure value perspective, such businesses look fundamentally undervalued. Especially when much of the bearish stockmarket action has been caused by hedge funds off-loading assets at distressed levels to meet margin and redemption calls.
Vedanta Resources (LON:VED)
Take Vedanta Resources. This FTSE 100 miner has extensive copper, zinc, iron ore and aluminium assets in India, Zambia and Australia. It also owns nascent power generation interests in Asia and has a £2bn market capitalisation, with 54% of the equity owned by its CEO, Indian billionaire Anil Agarwal.
The City has been spooked by the rapid unwinding of metals prices as demand has slid, leading to a jaw-dropping 75% slump in the shares over the past year. All the same, there is potentially an even bigger risk lurking for cash-heavy investors. With profligate central banks printing money like confetti, there is a very real chance that at some point we could see a painful devaluation in all major currencies against physical assets. In a scenario where the real purchasing power of cash savings would be hit, then Vedanta looks a shrewd insurance policy.
Furthermore, while there has been a great deal of concern about the sustainability of emerging market progress, little has been said about who will profit from lower commodity prices. One such beneficiary will be India, whose massive industrialisation process should become a whole lot cheaper, stimulating domestic growth and boosting Vedanta’s results.
Next despite having net funds of $789m, the City is skeptical of Vedanta’s aggressive expansion strategy to build new aluminum smelters and power plants and the potential strain on its balance sheet. However, these plans have recently been scaled back, and in October Agarwal also shelved the proposed $2.6bn purchase of Asarco unless a much lower takeover price could be agreed.
Finally, at November’s interims, Vedanta reported solid figures, and importantly maintained its dividend in the face of “challenging” conditions. I would estimate an average through-cycle earnings per share of more than 100p – putting the stock on an attractive p/e ratio of 7, paying a 4.3% dividend yield, and supported by net equity of around 850p a share.
Recommendation: good entry point at £7.00 for the more adventurous investor
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.