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Why South32's caution is paying off

South32 now boasts now boasts one of the strongest balance sheets of the large diversified miners
February 21, 2017

Included in South32 's (S32) half-year results presentation was a slide with an illuminating take on the control that mining executives actually exert over profit. In the last six months of 2015, underlying earnings before interest and tax were a measly $141m (£114m). A year later, that figure had leapt to $691m, although this was largely down to a combination of higher prices, better royalty and price-linked costs, and negative foreign-exchange and inflation swings - none of which management had a say in.

IC TIP: Buy at 161p

So while lower sales volumes were netted off by a $239m reduction in controllable costs, it goes to show that end markets still dominate. Luckily, South32's exposure to metallurgical coal, manganese and aluminium all worked in the company's favour in the second half of 2016, particularly as capital expenditure remained modest.

As we have noted before, commodity price uncertainty seems to have given the company an acute appreciation of a strong balance sheet, which, with help from a 197 per cent improvement in free cash flow ended the year with $1.9bn of cash and cash equivalents despite a temporary build-up in working capital.

Consensus market forecasts are for pre-tax profit of $1.75bn and adjusted EPS of 23¢ in the 12 months to June 2017, slimming to $1.34bn and 18.5¢ the year after.

 

SOUTH32 (S32)

ORD PRICE:161pMARKET VALUE:£8.57bn
TOUCH:160.8-161p12-MONTH HIGH:181pLOW: 56p
DIVIDEND YIELD:2.3%PE RATIO:14
NET ASSET VALUE:188¢NET CASH:$859m

Half-yearto 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
20152.98-1.63-32.9nil
20163.220.8011.73.6
% change+8---

Ex-div: 9 Mar

Payment: 6 Apr

£1=$1.24