What four different brokers think of South32’s first-half result

South32 (ASX: S32) reported its first-half results on Thursday this week, outlining the following key takeaways: 

• H1 underlying NPAT $560m vs expectations of $501.8m

• Statutory NPAT $685m

• Revenue $4.52bn ex-items vs expectations of $4.36bn

• Underlying EBITDA $1.36bn vs expectations of $1.34bn

• Interim dividend US$0.049/sh (100% franked), down from last year’s $0.087/sh

The market reaction as at 1040AEST Thursday 16 February 2023 saw prices down -2.60% to $4.50.

As at 1130AEST Friday 17 February 2023, the price has regained to $4.56. 

Here’s what four brokers think about S32’s result. Today we’re looking at Morgan Stanley, Goldman Sachs, Barrenjoey and Macquarie. 

Morgan Stanley 

Analysts: Rahul Anand (CFA), Gary Q Zhang, Matthew Costa 

• Morgan Stanley gives South32 a target price of $4.95

• This reflects a Total Shareholder Return (TSR) of 8.5%

• South32 rated OVERWEIGHT 

Commentary:

Morgan Stanley summarised S32’s first-half report as a “good result” overall despite revenue being 2% below its own internal estimates. 

This was offset by operating cash, US$210m higher than the investment’s banks internal estimates, which it called a “positive surprise.” Capex spending was in line. 

“Updated company guidance indicates upside risk to estimates, all else equal,” the bank wrote on Friday. 

Goldman Sachs 

Analysts: Paul Young, Hugo Nicolaci, Caleb Heiner 

• Goldman Sachs gives South32 a target price of $4.90

• This reflects a TSR of 7.45%

• South32 rated NEUTRAL 

Commentary:

Goldman Sachs highlighted strong performance in South 32’s first-half result. 

“Overall, cost performance in 1H was solid considering the inflationary backdrop,” analysts wrote. 

Analysts also cited improving Free Cash Flow (FCF) outlook towards the full-year result given higher production and higher commodity costs (base metals and metallurgical coal). 

However, Goldman Sach noted South 32’s balance sheet flipped to a net debt position of US$0.3bn (US$300m), which was more than its estimates of US$0.1bn. 

At the same time, the investment bank also boosted South 32’s Net Asset Value (NAV) up 3% to A$4.32 from A$4.19. 

Barrenjoey 

Analysts: Dr. Glyn Lawcock, Jim Xu, Daniel Morgan, Khyla Maher

• Barrenjoey gives South32 a target price of $4.60 

• This reflects a TSR of 0.87% 

• South32 rated NEUTRAL 

Commentary: 

Barrenjoey analysts retained a NEUTRAL rating on South32 despite 1H FY23 copper equivalent (CuEq) production rising 12% year-on-year. 

Analysts expect a further 6% growth to CuEq production to be reflected in full-year results. 

“But, with a portfolio of 2nd and 3rd quartile cost assets, S32 was heavily impacted by lower commodity prices, with underlying NPAT down 65% h/h and FCF generation annualising at <2% yield,” Barrenjoey’s mining researchers wrote. 

This is in contrast to Goldman Sachs’ read of higher prices benefitting the company’s performance.

One interesting note: Barrenjoey expects cooling geopolitical tensions between China and Australia to lubricate the process of selling off the Eagle Downs met coal project in QLD. 

The first shipment of Australian coal to China in two years recently docked last week. 

Macquarie Research 

Analysts: No authors cited 

• Macquarie gives South32 a target price of $4.60

• This reflects a TSR of 0.87% 

• South32 rated NEUTRAL 

Commentary: 

Macquarie described South 32’s first-half result as “mixed,” with EBITDA and underlying earnings above its expectations, but operating cash down -20% on expectations and FCF down -6%. 

South32’s US4.9c dividend was, however, 9% higher than what Macquarie was expecting to see. But this isn’t the whole story. 

“Despite a stronger than expected interim dividend, we note the company is trading on a free cash flow yield of 4% for FY23,” analysts wrote. 

“We continue to believe free cash flow yields is a proxy for near term shareholder returns.”

A look at S32's three month charts