Half-year numbers for South32 (S32) contained enough signs for investors to revise their view of the BHP spin-out, depressing the stock price. The allure of a special dividend – pushing the running yield to 5 per cent – was not enough. Chief among the concerns were the cross-divisional upward revision in full-year unit cost guidance, and the effects of lower sales volumes at Illawarra and Cannington.
The latter issue, taken alongside inflationary and currency pressures, conspired to offset most of the $702m (£500m) increase in underlying earnings shareholders could have expected – all things being equal. That explains the recent bout of profit-taking; after all, investors back commodity stocks for their exposure to commodity prices. A sharp increase in full-year realised price assumptions for nickel, coking coal, alumina and manganese is therefore to be welcomed, less so the jump in full-year per-tonne cost guidance at Cannington, from $142 to $159.
The silver-lead-zinc mine, which boasted a 68 per cent return on invested capital in FY2017, remains a high-grade, high-margin operation. It also remains a concern. Depletion of the orebody and increased rates of deformation in the underground mine have lowered productivity, and can only be managed with a corresponding drop in mining rates and throughput. Prior to these results, BMO Capital Markets was forecasting pre-tax profit of $1.45bn and EPS of 22¢ for the June 2018 year-end (from $1.51bn and 22¢ in FY2017).
| SOUTH32 (S32) | ||||
| ORD PRICE: | 202p | MARKET VALUE: | £10.5bn | |
| TOUCH: | 202-203p | 12-MONTH HIGH: | 236p | LOW: 143p |
| DIVIDEND YIELD: | 3.8%* | PE RATIO: | 13 | |
| NET ASSET VALUE: | 200¢ | NET CASH: | $1.43bn | |
| Half-year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
| 2016 | 3.22 | 797 | 11.7 | 3.6 |
| 2017 | 3.49 | 603 | 10.5 | 4.3* |
| % change | +8 | -24 | -10 | +19 |
| Ex-div: | 8 Mar | |||
| Payment: | 5 Apr | |||
| £1=$1.40. *Excludes special dividend of 3¢ a share, to be paid with the interim dividend. | ||||
