South32 boosts production but margins narrow

When we covered South32’s (S32) quarterly trading update at the end of January, we noted that “of those issues within its control, S32 has performed creditably”. Evidence on that score is provided by a 12 per cent increase in group production and the successful pivot towards commodities central to the energy transition.

Unfortunately, externalities were much to the fore. Recessionary fears were partly to blame for softening industrial demand through the second half of the year, a point borne out by various global Purchasing Managers’ Indices. Dollar strength was also a negative factor as it tends to stifle demand. Non-dollar commodity buyers often let inventory run down when the greenback is on the rise. Meanwhile, diplomatic and trade relations between Australia and China have not been favourable for the wider commodities complex, although there are signs that they’re beginning to thaw.

The mining and metals group is obviously in thrall to underlying commodity prices, so financial performance suffered as markets for aluminium, alumina, zinc, and manganese softened through the year. Underlying cash profits fell by 27 per cent to $1.36bn (£1.11bn) with the related margin down by 12.5 percentage points to 31.5 per cent. Several of the group’s metal products had come off record highs, while profitability was also constrained by what it termed “uncontrollable cost impacts” as inflation-linked energy costs ballooned.

The comparative figures need to be viewed in light of highly favourable pricing in FY2022. Shareholders are still in line for an interim dividend equivalent to 40 per cent of underlying earnings, and another $158mn is due to be returned under the group’s capital management programme by September. The level of shareholder returns holds obvious attractions, but S32 is priced in line with industry peers, so there is limited expectation of share price upside. Hold.

Last IC view: Hold, 255p, 25 Aug 2022