South32 Ltd (ASX: S32) has announced an extension of its share buyback program until September 2019 – so are the Aussie miner's shares undervalued or is management trying to prop-up its valuation?
What's been happening for South32?
South32 kicked off the year with several key leadership changes including a new Chief Financial Officer (CFO) and Chief Marketing Officer (CMO) for the miner as well as the succession of the group's Chairman.
The company reported solid half-year earnings in February which include US$1.3 billion in underlying earnings before interest, tax, depreciation and amortisation (EBITDA), up 38% on the prior corresponding period (pcp).
South32's real value add is in its strong cash flow generation ability and this was demonstrated in February with US$718 million in free cash flow in the half-year.
The company announced that it has US$127 million of the US$1 billion capital management program remaining while it is reshaping its portfolio its Hermosa, Eagle Downs Metallurgical Coal and South Africa Energy Coal assets.
How does it stack up against its ASX200 peers?
The good news for investors is that South32 presents a solid value stock with a dividend yield of 3.85% and a P/E ratio of 9.5x earnings. With a relatively low-cost base, I think South32 is a good portfolio option for investors seeking a stable high cash flow investment with the potential for stable capital appreciation.
Its former parent company, BHP Group Ltd (ASX: BHP) is 10 times larger than South32 with a market cap of $182 billion, but offers a comparable 4.2% dividend. BHP's share price is up 12.5% this year but is still trading at a relatively lofty 26.2x earnings.
Fellow blue-chip miner Rio Tinto Ltd (ASX: RIO) also offers a 4.2% dividend but trades on a much closer to multiple to that of South32 at 8.5x earnings. Rio's current $95.23 per share valuation is relatively close to its 52-week high, which makes it much more compelling than BHP at this point in the cycle.
I think South32's strong free cash flow could pay dividends for investors should we see economic growth start to turn southwards in 2019. The company's growth prospects seem solid from a strategic perspective, and I think the low relative valuation presents a compelling investment case in the next 6-12 months.
For those who are looking for more growth than cash flow, I'd suggest checking out this top-rated stock in a booming industry could give you the edge as a growth investor.
