28/11/2008 - 10:20

BHP ratings upgraded while Rio suffers

28/11/2008 - 10:20

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BHP Billiton has emerged from its decision to dump a $100 billion-plus takeover for rival Rio Tinto Ltd with 'buy'recommendations from analysts, while Standard & Poor's has maintained its rating for Rio but warns of a downgrade.

BHP Billiton has emerged from its decision to dump a $100 billion-plus takeover for rival Rio Tinto Ltd with 'buy'recommendations from analysts, while Standard & Poor's has maintained its rating for Rio but warns of a downgrade.

Goldman Sachs JBWere metals and mining analysts say BHP Billiton is in "excellent shape" following the decision, with net debt of "just" $US6.3 billion ($A9.58 billion).

"This strong financial position will allow BHP to pursue its organic growth options aggressively through the cycle and allow the company to opt to buy rather than build as opportunities arise," they said in a client note.

The investment house had a dimmer view of Rio Tinto, because of its struggling aluminium business and is carrying around $US40 billion ($A60.8 billion) debt of during a credit crisis.

"We believe the company has lost flexibility, which will allow its main competitor a freer run to expand and acquire through this cycle," the analysts said, alongside their hold recommendation on Rio stock.

"We do believe Rio will be able to repair its balance sheet in time unless markets significantly deteriorate from here."

Goldman Sachs JBWere has a share price target of $40.14 a share on BHP Billiton and a target of $53.31 on Rio Tinto.

Standard & Poor's Rating Services echoed Goldman's Rio sentiments but maintained its corporate credit rating on the miner at BBB+/A-2.

However it revised the implications for Rio from developing to negative.

"The revised CreditWatch placement reflects our concerns that Rio Tinto will be challenged to improve and maintain its credit metrics to be in line with the 'BBB+' rating category, notably a ratio of funds from operations to adjusted debt of at least 30%," S&P said in a statement.

"There is a high likelihood of a downgrade in the near term, once we have assessed the group's business plans, notably the nature and extent of corrective actions.

"A clear and deliverable deleveraging strategy is needed to mitigate negative pressures that could result in a lowering of the long-term rating of up to two notches."

Merrill Lynch analysts also have a buy recommendation on BHP Billiton, with a share price target of $40 a share.

"We see a 47 per cent upside potential from (the) current price of $27.25," they said in client note.

"In a weak economic environment, BHP's lower operational and financial leverage should result in the shares outperforming those of higher cost, more financially geared peers."

BHP Billiton on Wednesday abandoned a 12 month takeover play for Rio Tinto, citing its high debt and more challenging market conditions, particularly for commodities.

The Merrill Lynch analysts have assigned Rio Tinto an "underperform" recommendation and a share price target of $50 a share, offering 19 per cent upside potential.

"We admit Rio looks like compelling value on (a price to earnings ratio) and (price to net present value basis) and believe that the recent sell-off provides an attractive entry point for longer-term value funds," they said.

"But with net debt ($US40 billion greater than market cap ($US35 billion), we believe that most investors will find credit risks out-weigh the value-reward in these volatile markets.

"We prefer BHP Billiton over Rio."

BHP Billiton was trading at $30.44, up $1.64, at 1147 AEDT while Rio Tinto was at $45.89, up $3.04.

 

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