South32: Rewarded for its success

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
22 October 2021, 8:00 AM
Sectors Covered:
Mining, Energy

  • We see S32 remaining in a strong position with solid earnings momentum and progressing towards completion of the Sierra Gorda acquisition.
  • A good 1Q22 result from S32, with solid performances from GEMCO, South African manganese, Cannington and its ali business.
  • We remain within the 30-day pre-emptive period for Sierra Gorda operator KGHM, along with also needing other typical approvals.
  • Strong metal prices give S32 a chance to keep reshaping its portfolio as it continues to work around the assets it inherited (Illawarra sale?).
  • We have a positive view on S32, but in terms of investment view the appeal has been lowered by the re-rating its share price has already experienced. We maintain our Hold rating.

1Q22 recap

Few surprises in the 1Q22 operational result.

The standout performances were from S32’s manganese ore operations in Australia (GEMCO) and South Africa (Mamatwan), for a total 1,565kt +7% yoy (vs MorgE 1,416kt).

Illawarra’s performance was mixed, with steady met coal production of 1,575kt (vs MorgE 1,569kt) on better longwall productivity. Thermal coal sales meanwhile disappointed at 218kt (vs MorgE 250kt) with S32 flagging it was unviable to sell lower grade material given soaring freight costs.

Cannington was good on balance, with better-than-expected silver production of 4.2moz (vs MorgE 3.5moz), and lead output of 31.9kt (vs MorgE 31.5kt), while zinc volumes were below our estimate at 15.4kt (vs MorgE 16.4kt).

Alumina 1,278kt (vs MorgE 1,290kt) and aluminium 248kt (vs MorgE 248kt) were both in line with our forecasts.

Sierra Gorda transaction is progressing through the 30-day pre-emptive period held by operator KGHM and typical approvals.


The strong environment across metal prices has created supportive earnings momentum for S32. For a miner like S32 which has been transitioning the portfolio it inherited, this cycle creates a window where it can move some otherwise disappointing assets.

We see Illawarra firmly in this category, and we expect there will be no greater opportunity to divest these difficult coal operations than right now.

S32 is trading on 4.8x FY22F EBITDA, which does appear fair value given the strength of some metal prices which will likely moderate in time.

Forecast and valuation update

We have only made minor adjustments to our estimates factoring in the 1Q22 operational result.

Small change in valuation as a result to (login to view target price).

Investment view

S32 is in good shape having made a number of good moves in recent years (most notably divesting SAEC, acquiring Hermosa and acquiring its Sierra Gorda interest). While net debt post acquisitions will remain a very manageable 0.55x ND/EBITDA.

Trading close to our valuation we maintain a Hold recommendation.

Price catalysts

Completion of Sierra Gorda transaction.

Coal/metal price volatility given current earnings momentum.


COVID-related risks to metal demand and S32 operations.

Risk Sierra Gorda transaction is not completed.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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