South32 surges as analysts initiate

SHARES in newcomer South32 bounced back from a lacklustre debut yesterday as analysts formally initiated coverage on the stock.
South32 surges as analysts initiate South32 surges as analysts initiate South32 surges as analysts initiate South32 surges as analysts initiate South32 surges as analysts initiate

South32 CEO Graham Kerr

Kristie Batten

South32 shares hit as high as $A2.29 yesterday morning after closing at $2.05 the previous day, after more positive listings in London and Johannesburg.

The company took around 50 analysts on a tour of its Australian operations last month ahead of its listing yesterday.

JP Morgan’s Lyndon Fagan this morning initiated coverage on South32 with an overweight rating and $2.95 price target.

“The investment case for S32 is attractive in our view, with un-stretched valuation metrics and low gearing,” he said.

“Further, we expect positive near-term guidance on cost out, productivity measures and strategic direction.”

RBC Capital Markets analyst Chris Drew rates South32 as an outperform with a $2.60 price target, describing the company as an attractive longer term investment proposition.

“It offers exposure to a high-quality portfolio of assets, good forecast cashflow, a strong balance sheet and significant leverage to an expected improving commodity cycle,” he said.

Macquarie analysts said South32 provided investors with a unique mix of commodities.

“Importantly S32 is the only large cap ASX resources stock that has either no material debt or exposure to iron ore,” Macquarie said.

Macquarie initiated coverage with an outperform rating and $2.40 price target.

Analysts agree South32 has limited growth options within its current portfolio and expect the company to target external opportunities.

JP Morgan and RBC suggest the company could target copper opportunities.

“Given BHP’s favourable copper views (which we assume are likely to carry over into South32) and

South32’s lack of copper exposure, we think that copper assets are a likely target,” Drew said.

Macquarie doesn’t expect any M&A from South32 in the first year of its life.

“However should Anglo American look to sell its share of the manganese assets, then this could be the most logical first step for S32, given it already operates the projects,” it said.

“We estimate the cost of consolidating the manganese assets would exceed $US1 billion.”

South32 CEO Graham Kerr told Bloomberg yesterday that the company was in a “great position” if Anglo decided to divest its 40% stake.

RBC values the balance of the Samancor manganese assets at $900 million.

In Perth yesterday, Kerr laughed off speculation that South32 was a takeover target for Mick Davis’ X2 Resources.

He said he preferred to focus on what the company could control.

“It sounds boring but it’s safety, volume, costs, financial performance,” he told reporters.

“We’ve spent a lot of time talking to investors about the value proposition. I think it’s been well-received.”

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