South32 has analysts’ lips smacking
secondary listing of South32 on the JSE has shed rare light on the troubled mining sector, which has lost so many investors in the last 18 months that only three mining f irms take their place among the top 20 shares.
Make that four mining f irms; well, nearly. At a market capitalisation of about R107bn, South32 is the 21st largest stock on the bourse, but it is most likely to move higher based on the assessments of analysts who think the company is worth buying.
“We love the idea of South32 and see this as a great opportunity for its management to prove the unrealised value in these non-core assets,” purred SP Angel, a UK stockbrokerage on the day of the firm’s listing.
South32 is the creation of BHP Billiton, which decided to demerge its non-core assets – including coal, manganese and aluminium in SA; and nickel and coal in Australia – rather than sell them piecemeal in trade sales. The theory is that it was better to let the market, rather than individual buyers busting for a bargain, set the price for the assets.
Apart from the logic of the demerger, South32 is also part of BHP Billiton’s strategy to reward its shareholders: each shareholder in BHP received one South32 share for every BHP share owned. The company was initially meant to trade in Perth and Johannesburg only, but UK shareholders also asked for an opportunity to trade the share, hence its listing there.
Whether BHP Billiton will continue on the JSE indefinitely is a moot point, but for the time being there’s a lot to look forward to in South32, according to analysts.
The dividend policy is a minimum payout of 40% of earnings, but Macquarie Research thinks that could be much higher in the first year, while Graham Kerr, South32’s CEO, sets about cost-cutting.
“We believe returns to shareholders could be closer to 70% in the first year as S32 rewards investors for patience while the cost-out programme is implemented,” said Kieran Daly, an analyst for Macquarie. Cost savings have been calculated at about $300m (R3.5bn) and there will be further optimisation as the firm executes its regional approach to management.
“The r e g i o n a l model is an opportunity to get more out of existing assets,” said Kerr. “We will take out some of the complexity of the assets and levels of management and increase their value,” he said.
Asked by Finweek if this was perhaps another way of saying retrenchments, Kerr responded: “No doubt South32 has some legacy issues from BHP. No doubt we will run the assets differently from day one and in how we structurally set ourselves up. We will look to be an organisation that is more lean, agile and entrepreneurial.” There are, however, some things worth thinking about in respect of South32. One is its approach to the SA business environment. In BHP Billiton’s hands, its coal assets struggled to compete for expansion or growth capital such that Khutala and Klipspruit – important suppliers to Eskom – have fewer than six years of operating life at current rates of production.
That means that decisions on investing in them will have to be made soon, but how likely is that in the current environment where relations between the sector and government have plumbed new depths, and the reach and meaning of empowerment is hard to decipher?
“At South32, we believe in what government is trying to do. We are absolutely behind that in every single way,” said Kerr. “Clearly, though, if we are going to invest large capital, we need certainty around policy.”
Said Kerr: “Klipspruit and Khutala are going along neck and neck on which is going to get an extension approval first. It will be the FY17 to FY18 before we have to make decision on the process. But those are the assets we are focusing on now.”
SOUTH32 IS THE STOCK ON THE BOURSE, BUT IT IS MOST LIKELY TO MOVE HIGHER.