What is S32 and is it worth holding?

by Michael Gable

South32 (S32) was formed via a demerger of BHP Billiton’s (ASX: BHP) non-core assets, which BHP identified as not fitting its four-pillar strategy. The de-merger was approved by shareholders on 6 May 2015 and S32 started trading on the ASX on 18 May 2015.
S32 is a diversified miner, primarily exposed to aluminium and alumina, but spread across geographies, mainly Australia, Brazil and South Africa. Other commodity exposures include manganese, nickel, thermal & coking coal, silver, lead and zinc.
The Company operates under a regional model, with the Australian-based assets run from its head office in Perth (WA) and its Southern African assets run from the Johannesburg office in South Africa. S32’s primary listing is on the ASX with secondary listings on the Johannesburg and London stock exchanges.
Our View on S32
For the full summary of our findings, please contact us. However, essentially we believe S32 can do well over time.

While S32’s existing asset base has only modest production growth opportunities (they were after all considered non-core to BHP Billiton), we consider the investment attractions in S32 are: i) The potential to generate an earnings surprise to the upside as a result of targeted cost savings, ii) Capital management opportunities and iii) The likelihood of a higher dividend (currently 2.7% on a 1-year forward basis) as the payout ratio progressively increases in FY16 and FY17.

Earnings are likely to be volatile, however then this makes S32 leveraged to any improvement in global economic activity. Nonetheless, S32 has a diversified earnings stream, mid-second-quartile cost position and a robust balance sheet that positions it to capitalise on any cyclical upswing through improved operating cashflow.

The payout ratio initially is expected to be around 40%, rising to 50-60% in FY16. The relatively low payout ratio of 40% reflects S32’s limited ability to fully frank its dividend in its first year as a result of not gaining any franking credits from BHP Billiton.


Disclaimer: Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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