Shares of the freshly listed South32 Ltd (ASX: S32) exploded in the days following its ASX debut, but have since retreated considerably, offering investors a second chance to buy at a reasonable price.
South32 was recently spun-out of its parent entity, BHP Billiton Limited (ASX: BHP), as a result of an overwhelming shareholder vote in favour of the transaction. Indeed, BHP has been marketing it as a strategy to unlock considerable shareholder value by allowing both entities to focus on their own growth trajectories, whilst also allowing them to improve operating efficiencies within their own operations.
This is one of the most convincing reasons to invest in South32. The assets now housed within the new entity have long been neglected by BHP's management in favour of their 'core commodities pool', being iron ore, coal, copper and petroleum. Now, the other assets are the sole focus of CEO Graham Kerr and his team, who will strive to improve overall operating efficiencies while at the same time, driving costs lower.
Indeed, numerous other recent spin-offs have proven that this strategy is capable of generating enormous shareholder returns. Perhaps the greatest recent examples are Orora Ltd (ASX: ORA) and Recall Holdings Ltd (ASX: REC), which demerged from Amcor Limited (ASX: AMC) and Brambles Limited (ASX: BXB), respectively.
Over the past year, the pair have risen 58% and 62% respectively, compared to a 37% climb for Amcor and 18% rise for Brambles. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has jumped just over 4% in the same time.
Of course, there is no guarantee that South32 will do the same, and it is by no means a risk-free investment. But with a reasonable amount of debt and the capacity to improve profitability, South32 appears to be a great investment prospect at its current price tag of $2.17 – down 0.9% for the session.
