Goldman Sachs initiates coverage of South32 at buy

Goldman Sachs initiated coverage of South32 Limited, the new company spun off by BHP Billiton this week, at ‘buy’ with a 12-month target price of A$2.70, as it added the stock to its conviction list.

South32 was created to house assets that BHP has decided are non-core, including coal, manganese, aluminium and nickel mines and smelters.

The buy rating reflected Goldman’s positive outlook, based on better-than-industry cost reduction potential, a business mix that’s not geared to the Chinese steel and construction cycle and a robust balance sheet and cash flow.

Goldman also pointed to the historical strong share price performance of demergers in Australia.

“Whilst the assets were non-core to BHP (Billiton), the creation of S32 delivers a unique large cap, non-iron ore-exposed equity with a robust balance sheet into the Australian market,” said GS.

“From its creation S32 has been blessed with a strong balance sheet and two cash cow assets in Worsley and Cannington,” Goldman said.

“By the end of full-year 2016 we expect S32 to be in a net cash position, making it the only one of three mining companies globally forecast to be in a net cash position.”

It noted that the company has stated a dividend policy of around 40% of earnings per share.

GS said it expects S32 to be in a strong enough financial position to escalate returns to shareholders or look to take advantage of any pricing anomalies in the market through M&A, putting it in “a unique position amongst its global peers.”