Morgan Stanley upgrades Glencore, says concerns overdone

(Sharecast News) - Morgan Stanley upgraded Glencore on Tuesday to 'overweight' from 'equalweight' as it argued that concerns about deteriorating coal prices and around marketing profits in a low-volatility post-war world are "exaggerated". Morgan Stanley noted that the shares have substantially lagged their diversified mining peers as well as their own commodities basket, partly driven by concerns around the potential implications of an end to the Ukraine war on its business' earnings power.

It said coal exposure has become out-of-favour given the pullback in commodity prices, while some investors are increasingly concerned about the impact on marketing profits from potentially lower commodity price volatility and fewer dislocations.

The bank said the "steep" discount to sum of the parts offers a compelling risk/reward.

Morgan Stanley said Glencore has a track record of proactively managing production during environments of subdued commodity prices (e.g. zinc) by taking loss-making tonnes off the market and scaling back spending to protect cash flows.

It also pointed out that Glencore's marketing business historically has had higher levels of profitability during periods of heightened volatility and increased price dislocations.

"There is a perception that a potential end to the war in Ukraine would lower commodity price volatility, and therefore diminish the business' earnings power," it said.

"We disagree and argue that energy price volatility is on the rise, while tariff risks have amplified geographic dislocations across base metals, presenting the business with attractive arbitrage opportunities."

The bank said marketing profits have shown resilience through cycles and that Glencore is well placed to continue to meet its long-term Marketing EBIT range of $2.2-3.2bn.

The bank, which kept its price target at 470p, said Glencore was its new "top pick".

At 1020 GMT, the shares were up 1.9% at 357.10p.