South32 Limited

Consistent margin profile maintained: South32 Limited (ASX: S32) is a global diversified mining and metal company. The company reported its 1HFY19 results in which it reported a revenue of US$3.8 billion vs. US$ 3.4 billion reported in 1HFY18 reflecting a rise of 9%. The underlying EBITDA for 1HFY19 came in at US$ 1.3 billion resulting in a growth of 20 percent on a pcp basis.

Further, the underlying earnings came in at US$ 642 million registering a healthy 18 percent growth on pcp basis. The high production at Australian Manganese, higher commodity prices, and strong operating performance supported the overall earnings growth. The underlying earnings per share growth of 20 percent was aided by the on-market share buy-back activity.

The company reported an improvement in its underlying EBITDA margin by 260 bps coming in at 38.3 percent in 1HFY19.On the underlying commodity front, the company witnessed operating margin expansion in Alumina (47 % in 1HFY19 vs 41% in 2H FY 2018), Metallurgical coal (51 % in 1HFY19 vs 24% in 2H FY 2018), and manganese ore (64 % in 1HFY19 vs 61% in 2H FY 2018). However, it witnessed margin contraction in Aluminium (2 % in 1HFY19 vs 16% in 2H FY 2018), base and precious metal (27% in 1HFY19 vs 43% in 2H FY 2018), and energy coal (11 % in 1HFY19 vs 27% in 2H FY 2018).


Operating Margin Analysis (Source: Company Report)

Outlook:The company has indicated for a lesser unit cost guidance as they have been able to maintain operating discipline and benefited from an appreciating US dollar. The groups’ production volumes are also expected to rise by 5 percent in FY19. On Capex front, the company has lowered its FY19 guidance for sustaining capital expenditure by US$30 million to US$545 million.

On the analysis front,the company’s margin profile is healthy, net margin is at 16.7% vs. Industry median of 13.7%. The stock is currently trading at a price to book ratio of 1.2x as compared to industry median (Metals & Mining) of 1.7x. The stock has delivered a positive return of 16.35 percent for the past one year. However, in the past three months, the stock posted 11.83% return and is trading slightly below the average of 52 weeks high and low level of ~$3.62.
Considering higher net margin than industry median along with decent returns over the period of one year, we maintain our “Hold” recommendation on the stock at the current market price of A$3.750 per share (up 0.536% on April 01, 2019).  
 

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