Investment Thesis:
- Prices of S32’s key commodities are expected to be in moderate to relatively flat range in comparison to FY21 realised prices
- The company is expected to produce significant free cash flow over the next three years, which would be adequate to support growth and capital management
- Substantial cash balance would provide flexibility and capital management
- Board to expand S32’s capital management program by $120m to $2bn, excluding $252m to be distributed to shareholders
- Regular dividends are being paid inspite of uncertainty and volatility
- Both Standard and Poor’s and Moody’s reaffirmed their respective BBB+ and Baa1 credit ratings
Key Risks:
- Key commodity prices decrease
- Global growth experiencing significant shock
- Inflationary pressures leading to cost blowouts and production disruptions
- Capital management initiatives are not handled by company adequately
- Currencies witnessing adverse movements
- Acquisition which may negatively impact the value of the organisation
Key Highlights:
- Despite ongoing challenges put forth by pandemic, record production has been observed in Worsley Alumina, Brazil Alumina and Australia Manganese
- Divestment of South Africa Energy Coal, the TEMCO manganese alloy smelter, and a portfolio of no-core precious metals royalties with the aim to reduce capital intensity and improve underlying operating margin
- Declaration of 2H21 dividend of 3.5cps, fully franked, at a payout ratio of 46% of underlying earnings. An addition of special dividend of 2.0cps was also declared, bringing the total dividend to 6.4cps versus 3.2cps in FY20.
- Strong operating performance and higher commodity prices drove a +153% increase in underlying earnings to $489m
- Underlying EBITDA of $1,564m was up +32%
- Margin of 26.4% up from 21.9% in FY20
- Underlying EBIT of $844m was up +89% from $446m in FY20, driven mainly by higher prices in aluminium, silver, zinc, nickel partially offset by the lower prices of coal, manganese ore and alumina
- Higher sales volume of $115m
- Controllable costs of $238m; offset by change in exchanges which reduced earnings by $185m, and higher electricity costs of ($103m)
- Allocation of $346m for an on-market share buy-back
Company Profile:
South32 (S32) is a globally diversified metals and mining company. S32’s strategy is to invest in high quality metals and mining operations where their distinctive capabilities and regional model enables them to extract sustainable performance. The regional model means their businesses are run by people from within the region. The company’s African operations are supported by a regional office in Johannesburg South Africa and Australian and South American operations by an office in Perth.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis
- Chinas investigation outcomes are better than expected.
- There is a significant opportunity to expand its Asian business (reallocation opportunities).
- Premiumization and good cost control provide opportunities for group margin expansion.
- The recovery in America’s business could result in significantly higher margins.
- Currency movements in favour (due to a falling AUD/USD).
- Additional capital-management initiatives.
Key Risks
- Further deterioration (or worst than expected) outcome from china tariff / investigation.
- United States turnaround disappoints.
- Consumptions of wine decreases in the key market.
- Unfavorable condition in demand and supply of wine’s global market.
- Increase competition in key market.
- Currency fluctuations that are unfavorable (negative translation effect).
- Changes in Chinese policy and/or demand have an impact on volume growth.
FY21 Results Highlights
- EBITS of $510.3 Million, was in line with the pcp, on EBITS margin 0.6ppts higher to 19.9%. On an organic basis, EBITS was up +3%, reflecting top-line growth driven by $10-30 Premium portfolio and improved CODB, partially offset by ongoing impacts from the pandemic, significantly reduced shipments to Mainland China (due to import duties) and higher COGS on Australian sourced wine.
- Strong operating cash flow reflects a lower Californian vintage intake and adjusted Australian vintage, in addition to shift in regional sales mix in Asia. Cash conversion of 100.8% (or 96.9% excluding the changes in non-current luxury and premium inventory) was in line with TWE’s target of 90% or above.
- Net debt declined $376.5m to $1,057.7m as a net debt to EBITDAS of 1.6x improved from 2.1x at year end. TWE has total available liquidity of $1.2billion at year ended versus $1.4billion at FY20 end.
- Return on Capital Employed improves 0.6ppts to 10.8%.
- The board declared a final dividend of 13.0cps, up and resulted in the full year dividend of 28.0cps (equating to payout of 65% of NPAT, consistent with TWE’s long term dividend policy).
Company Profile
Treasury Wine Estates (TWE) is one of the world’s largest wine companies listed on the ASX. As a vertically integrated business, TWE is focused on three key activities: grape growing and sourcing, winemaking and brand-led marketing. Grape Growing & Sourcing – TWE access quality grapes from a range of sources including company-owned and leased vineyards, grower vineyards and the bulk wine market. Winemaking – in Australia, TWE’s winemaking and packaging facilities are primarily located in South Australia, NSW and Victoria. The Company also has facilities in NZ and the US. Brand-led Marketing – TWE builds their brands through marketing and distributes its products across the world.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
