In an Aug. 23 research note, analyst Edward Sterck with BMO Capital Markets reported that South32 Ltd.'s (S32:ASX; S32:LSE) fiscal year 2018-19 (FY18) earnings surpassed expectations and that the company has an advantage over its peers.
"Overall, South32 remains possibly the best positioned of the diversifieds, with a product mix that has been less impacted by the financially driven selloff in the exchange-traded commodities," Sterck wrote.
The analyst relayed South32's FY18 financial results and reviewed guidance for FY19 and FY20. As for FY18 revenue, the company generated US$7.5 billion, which was in line with BMO's forecast. EBITDA was $2.5 billion, which was about 1% higher than BMO's projection.
Underlying earnings totaled US$1,327 million. This exceeded BMO's estimate by 5%, mostly due to lower taxes.
As for specific division performance, the standouts were Met Coal and RSA Thermal Coal, whose EBITDA exceeded BMO's estimate by 42% and 11%, respectively.
In contrast, Aluminium and Alumina's EBITDA came in under BMO's target by 6%, due to high input costs of pitch and coke, a circumstance affecting all producers. Despite the miss, Aluminum and Alumina's FY18 EBITDA surpassed that of FY17 by 41%.
At fiscal year-end, South32 had US$2.0 billion on the balance sheet, a US$0.06 billion increase since H1 FY18E. The company's final dividend for the year was US$0.065 per share, slightly below BMO's US$0.067 per share forecast.
As for FY19 guidance, it remains the same. Maiden FY19 production targets for Illawarra are 1% lower than BMO's forecast, and FY20 targets are 11% lower. Overall FY20 maiden guidance is 3% below BMO's estimate on average.
Projected FY19 capex and costs are up. The new capex figure, US$840 million versus BMO's US$620 million, includes US$100 million for Hermosa and additional capital for Illawarra and Worsley.
Maiden FY19 costs are 3% higher than BMO's number, but lower costs are anticipated at GEMCO, Worsley and Illawarra. Those, though, would be offset by the increases elsewhere.
BMO has an Outperform rating and a £2.50 per share target price on South32. Its current share price is around £1.94.[NLINSERT]
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Disclosures from BMO Capital Markets, South32, August 23, 2018
I, Edward Sterck, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures
Disclosure 9C: BMO Capital Markets makes a market in South32 in Europe.
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