South32: Reasonable Q4 in tough environment

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
26 July 2022, 9:00 AM
Sectors Covered:
Mining, Energy

  • After falling 27% in 3 months, and global growth fears still lingering, we see now as an opportune time to add to South32 (ASX:S32) positions. Trading at a 40% discount to our target price and with an ~18% FCF yield and expected 7.9% FY22F div yield.
  • 4Q22 was a mixed quarter for S32 operationally. Strong performances once again from Cannington and Worsley, while Illawarra and Cerro Matoso both underperformed expectations.
  • We maintain an Add rating and (login to view).

4Q22 recap

A mixed result across S32’s highly diversified business. S32 surprised in being able to maintain FY22 unit cost guidance across key segments (ex-Sierra Gorda/copper which is expected to come in 5% above guidance). Although S32 was only able to achieve this through lower currencies.

In production terms, Cannington and Worsley were the standouts, with both ahead of expectations. While coal (Illawarra) and nickel (Cerro Matoso) both disappointed in 4Q22 on a combination of COVID-19 impact to labour resources and adverse weather impact.

4Q22 production: alumina (actual 1,361kt vs MorgansF 1,341kt vs Visible Alpha consensus 1,325kt). Aluminium (actual 255kt vs MorgansF 256kt vs consensus 262kt). Copper (actual 16.9kt vs MorgansF 13.8kt vs consensus 19.4kt).

Zinc/silver/lead (zinc actual 15.4kt vs MorgansF 16.6kt vs consensus 18.3kt and silver actual 2,836koz vs MorgansF 2,747koz) and lead (actual 25.8kt vs MorgansF 27.2kt vs consensus 29.1kt).

Coal (met + thermal) (actual1,380kt vs MorgansF 1,665kt vs consensus 1,529kt).

Nickel (actual 10.8kt vs MorgansF 12.9kt vs consensus 11.6kt).

Manganese was mixed although overall strong versus guidance (group 4Q22 manganese ore 1,469kt vs MorgansF 1,200kt vs consensus 1,244kt).

FY22 expectations

We are expecting S32 to show off a strong year when it reports its FY22 earnings result on 25 August. We forecast 2H22F revenue growth of 49% and underlying EBITDA growth of 142%. We forecast FY22 EBITDA of US$4,629m (vs US$1,864m 12-months ago) and underlying NPAT of US$2,810m (vs US$489m 12-months ago).

With metal prices outstripping unit cost growth, and supported by an adequate balance sheet, we expect S32 to flex its final dividend. We forecast a 2H22 final dividend of US 15.6cps (vs US 5.5cps a year ago).

Forecast and valuation update

Marginal adjustments to assumptions aligning FY22 estimates with various guidance.

Post changes our valuation-based target price has been revised to (login to view)).

Investment view

While expecting FY22 earnings to be materially higher, S32’s share price is only trading in line with levels seen in late CY21. On an implied FY22F EBITDA multiple basis this only places S32 on ~2.0x.

Trading approximately 40% below our (login to view) target price, with an FCF yield of ~18% and dividend yield of 7.9% FF, we see now as an opportune time to accumulate on weakness as global growth fears linger.

We maintain our Add recommendation.

Given its heavy diversification across base metals, resilient coal earnings, and healthy balance sheet, we expect S32 to perform well in a 2HCY22 sector recovery.

Price catalysts

  • FY22 earnings result expected on 25 August.


  • COVID risks to operations and end markets.
  • Operational and opex risk.

Find out more

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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