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South32 earnings battered by low prices

Outlook not great either with coronavirus hitting Chinese industrial production
February 14, 2020

South32’s (S32) earnings have been smashed by low commodity prices in the first half of its 2020 financial year. Underlying cash profits were half that of the corresponding period at $678m (£522m), and the interim dividend will be a fifth of what it was a year earlier.  

IC TIP: Hold at 135p

South32 chief executive Graham Kerr said it was a “tough” half because of commodity prices, but picked positives out of the period. “If you think about the things that we can control, production and costs, they're on track across the majority of our businesses outside of [South African Energy Coal],” he said. 

South32 mines alumina, manganese, coal, nickel, lead and zinc, and produces aluminium. Only nickel saw improved prices in the period, with an average 21 per cent drop in prices for the company overall. These lower prices resulted in a dramatic fall in the cash profit margin from 38.3 per cent to 24 per cent year on year. 

Lower industrial demand was to blame for alumina and manganese price weakness, but the thermal coal division – which South32 has found a buyer for – was hit by South Africa’s continued electricity struggles. Aluminium production was also hit by load-shedding in the country, but the two smelters were able to keep production stable year on year. 

The company will maintain its buyback programme, although Mr Kerr said on an analyst call that he would not take South32 into net debt territory to keep this going. In the six months to 31 December, free cash flow was $124m and the company finished the year with net cash of $277m after $331m of shareholder payouts in the 2019 financial year and $192m in buybacks. Another $192m in shares will be bought back before 4 September. 

BMO Capital Markets analyst Edward Sterck said South32 had done well in the circumstances, and modelled a 4-8 per cent increase in cash profits if commodity prices had stayed flat. 

Looking ahead, industrial commodities have been hit by coronavirus uncertainty. Manganese is South32’s product most exposed to China, with 64 per cent sold there. Mr Kerr said there had been an uptick in prices in early January and saw a possible “broad-based fiscal stimulus in China” in the second half of 2020 as a price driver. 

Bloomberg consensus forecasts are for full-year cash profits of $1.36bn, down from $2.2bn in FY2019. 

SOUTH32 (S32)   
ORD PRICE:135pMARKET VALUE:£6.61bn
TOUCH:135-136p12-MONTH HIGH:214pLOW: 128p
DIVIDEND YIELD:2.2%PE RATIO:NA
NET ASSET VALUE:203pNET CASH:$277m
Half-year to 31 DecTurnover ($bn)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)*
20193.887012.55.1
20203.21872.01.1
% change-16-79-84-78
Ex-div:05 Mar   
Payment:02 Apr   
 £1 = $1.30. *Excludes a special dividend of 1.1ȼ a share in H1 2020 and 1.7ȼ in H1 2019