While the free cash flow yield looks attractive, and the company has a balanced and predictable capital allocation strategy, Morgan Stanley believes it is insufficient to warrant an upgrade.
The broker’s commodities team forecasts a rapid decline in iron ore prices from the current US$85/t, to US$70/t by the fourth quarter of 2020.
The broker is concerned that the re-rating in Rio Tinto’s valuation multiple may not be sufficient to offset the magnitude of the downside to earnings.
Morgan Stanley maintains an Equal-weight rating and lowers the target to GBP45 from GBP46. Industry view is In-Line.
Current Price is $94.84. Target price not assessed.