Episode 546:
Tony 25:51
Yeah, sure. Well, I’ll let you do that. The reason for doing South32 is a) it’s a large stock, and b) I noticed recently it’s back on the buy list and it’s above its second buy line, so it’s able to be bought. South 32, for people who don’t know, spun out of the BHP seven years ago and was rather notoriously at the time known as the “bad BHP”. BHP promoted itself as the good. Part of their portfolio was going to remain with BHP, the iron ore in particular, and they were going to clean up their portfolio of mining assets because they’d gotten too big and complex. They were going to roll up all the other mines and put them into a spin off called South 32, which was quickly called the “bad BHP”. But it hasn’t been too bad. South 32 is mainly an alumina and aluminium business, probably about half their mines and smelters are in those two businesses. But they also have copper mines, which is a buy at the moment on the commodity charts, manganese which is a sell, zinc which is a sell, met coal which is a Josephine, and lead and nickel which I haven’t looked up. So, you know, something like 40% comes in those smaller metals, so they could still have issues with commodities. But certainly, aluminium is strong at the moment. They’ve changed what they initially listed over the years. They’ve been trying to become a better corporate player, in their eyes anyway, and they’ve gotten out of thermal coal, and they’ve gotten into things like hydro powered aluminium smelters. Their strategy is to transition away from carbon and make themselves a better corporate player in terms of climate change. That’s a good thing. But you know, I just wanted to flag the fact that I really don’t think it makes you a better corporate player if you divest yourself of thermal coal if it’s still being bought by someone else and operated by someone else. I mean, it makes no difference to the planet in that circumstance. If you wanted to get ticks in my book for being good on climate change, you bury the coal and plant trees above it. And South 32 didn’t do that, they just divested their coal; as other mining companies have done in trying to clean up their act, but it doesn’t help the planet because they just divest the mines somewhere else. Anyway, that’s my little rant on corporate greenwashing. Going through the numbers, the ADT is large for this stock. It’s $80 million bucks, so it’s gonna suit, I would think, all of our listeners. Large market cap stock: $17 billion. It’s a recent second buy line cross as I said. A couple of other things; it’s fairly shareholder friendly at the moment. They’ve had an ongoing buyback for a long time to use up the operating cash which has been thrown off by this company. They’re paying a high dividend, which is currently at an 8.5% yield, so that’s very good. And this is one of the stocks that I come to at certain points in the cycle which I like from a value perspective, and we’ll see there’s a fair bit of value in this one. But it’s one of those stocks where the PE is lower than the yield, which is an interesting situation that mining companies in particular can find themselves at certain times in their lives, and I quite liked that crossover when the PE falls below the yield. The numbers: I’m using a share price of $391, which is less than the consensus target, less than IV 1 and IV2, and also less than book plus 30%. So, on all those metrics it scores for us. Financial health is strong and steady; this is a company with lots of cash and low debt, so it’s financially very strong. For anyone who’s interested, the ROE on this company’s 27.4%, and of more interest to us, the Pr/OpCaf is four times. So, you’re buying a very large company and only four times the cash it’s throwing off. PE is 4.8, again, which is very low, which is also the lowest in the last three years, and so it scores on that basis for us. I guess where the numbers start to become a bit murky, and this is probably why we’re buying it cheaply, is the forecast earnings per share is to drop 45% next year. So, straightaway it scores a negative one on our growth over PE hurdle. And this is certainly the risk in this stock. However, at these kinds of prices, I think that risk is well and truly baked into the price. There are other risks, though; as I said, nearly 40% of the company is investing in commodities or operating mines that have commodities, which are Josephine outright sells, so that could be a problem for them. This company is still developing all of its mines and doing drilling, so the capital requirements are reasonably large. And then there’s the usual mining industry risks at the moment of COVID breaking out again and shutting down mines, rising supply chain costs, as well as increasing wages and difficulty finding workers. So, I should also point out, this is an international company. It has a lot of operations in South Africa and in South America, particularly in Brazil. So, there could be risks in those operating in different countries. I don’t think those countries necessarily pose sovereign risks, although they could, but it’s more likely that if there are risks to supply chains and finding staff that they could have different perspectives on them compared to how it goes in Australia. So, that could be better or worse compared to Australia. Last thing I should say is no founder/owner because it spun out of BHP, and scores well from the Stock Doctor point of view. It’s a borderline star stock and a star income stock, which get half a point each, so total of one in our checklist for a total quality score of 88% and a QAV score of 0.22. So, quite healthy on those metrics, not high up the buy list, but certainly worth looking at if you’re after a large ADT stock.
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