Deutsche Bank analyst Paul Young recently cut his valuation of South32 after the recent demerger from BHP Billiton. After reviewing shareholder documents, Mr. Young lowered the valuation from $US13bn to $US11.2bn. When adjusted for current spot prices of commodities, his valuation is lowered even further to $US7bn. The Deutsche Bank analyst believes that the stock price will sit around $2.00 per share, which is below market expectations. However, he believes the company is still in a “perfect position” to acquire up to $US3bn worth of Australian coal and offshore base metals and manganese assets. The analyst cited BHP’s “strong balance sheet” as a reason to be hopeful yet realistic about the demerger. “We still think all costs would have been extracted with the South32 assets in the portfolio, but the pace of cost out should be accelerated by the demerger," he said.
Other analysts and investors have projected a $3.00 or more share price for South32. However, Deutsche Bank is predicting a $2.68 share price at most. Mr. Young cited hidden demerger costs, limited saving opportunities and potential political and operating issues in South Africa as the reason for a lowered valuation. But analysts, including Mr. Young, believe South32 is still in a strong position to have future growth and acquisitions. The company is expected to first acquire greenfield mining assets rather than entire companies, according to the Deutsche Bank report. Mr. Young believes CEO Graham Kerr supports the acquisitions of mining assets rather than entire companies, citing the four longwall operations at Illawarra as a starting point for underground mine acquisitions. Aluminium and alumina assets account for about half of the company’s value. The single most valuable asset of the company is its Worsley alumina operations in Western Australia.
Author: Simon Herrmann
Apr 01, 2015
Simon is a financial analyst at independent research firm Wise-owl who wants to change the world by disrupting the cliché approach to investment decision making with convergent thinking. Wise-owl’s goal is plain and simple: Find the best opportunities for our members by following a proven methodology and to create long-term value through high-quality advice, innovation, technology and education. We combine industry experience and the agile mentality of a start-up. Wise-owl is the future of stock market investing.