South32, the baby spinoff from the mining giant BHP, hits the ASX on Monday with market valuations now varying wildly from $7 billion to around $15 billion.
However, despite the huge range in pricing most market analysts see South32 as a good play for when there’s an inevitable upswing in commodity prices.
And given that South32 represents about 10% of the value of BHP, then a value of about $3 would work based on the BHP share price now running at $32. That would value the company at the high end of the range.
Today is the last day to own a BHP share which entitles the holder to one South32 share. The action to also watch is the BHP share price come midday Monday. The streamlined BHP will have key assets in iron ore, copper, coal and petroleum. How investors will price the main company, minus the South32 assets, is a key question.
Morningstar’s fair value estimate for the new company is $3 a share. It says South32 is worth adding to portfolios at prices below $2.50, while $3.50 and above is profit-taking territory.
Deutsche Bank is looking at $2.68 a share. After a detailed review of the demerger documentation, Deutsche Bank cut its valuation of South32 to $US11.2 billion from $US13 billion. But it is positive on the outlook for the majority of South32’s commodities and has forecast earnings to double over the next five years.
With a strong balance sheet, Deutsche Bank thinks South32 is in a perfect position to pursue value acquisitions. The company has a $US1.5 billion debt facility available.
The new company is big enough to be added to the S&P/ASX 200 index. It will have $US8.3 billion of revenue and intends to distribute a minimum of 40% of earnings as dividends to its shareholders.
South32’s asset portfolio will include, across five countries, alumina, aluminium, coal, nickel, manganese, silver, lead and zinc. It’s head office will be in Perth.
Net debt is $US660 million, or only 2.6% of BHP Billiton’s $US25 billion.
This what South32 looks like: