The South32 Ltd (ASX: S32) share price could be great value according to one leading broker.
This morning analysts at Goldman Sachs looked through the mining sector and picked out South32 as a top pick.
Why is the South32 share price great value?
According to a note out of Goldman Sachs, its analysts have reiterated their conviction buy rating and lifted their price target on the mining giant's shares to $3.80.
Based on the latest South32 share price, this price target implies potential upside of 32% over the next 12 months.
Furthermore, this potential return stretches materially if you include dividends. Goldman currently estimates that its shares will provide an 11% dividend yield in FY 2022.
What did the broker say?
Goldman Sachs' commodities team has become very positive on aluminium and has upgraded its price forecasts for the metal. This is on the back of expected material cost-inflation, combined with a sharp deceleration in primary metal production.
The latter is expected to lead to the lowest supply growth forecast in close to 40 years. So much so, Goldman is forecasting a deficit of 3Mt by the end of 2023 and as high as 9Mt by the middle of the decade.
The broker expects this will lead to an average aluminium price per tonne of US$2,450 in 2021, US$2,900 in 2022, US$3,250 in 2023, and then US$3,500 mid-decade.
As a result, the broker has "little doubt that investors should view aluminium as in the early stages of a multi-year bull market."
South32 recommendation
Commenting on South32, Goldman said: "We increase our FY21-23 EPS estimates by 1%/11%/20% and NAV by 19% to A$3.86/sh to reflect changes to the GS commodities team's aluminium price forecasts, and raise our 12-month TP 12% to A$3.8/sh. Our TP is based on 50:50 NAV and EV/EBITDA with a 5.5x target multiple."
"We retain our Buy rating (S32.AX on the ANZ Conviction List) on: (1) Valuation: The stock is trading at 0.75x NAV (A$3.86/sh). (2) Strong FCF outlook: We forecast a FCF yield of c. 16% in FY22, driven mostly by higher base metal prices (combined c. 70% of FY22 EBITDA), (3) Increased capital returns: We assume the buyback is extended (at US$250mn p.a) and S32 pays out 70% of earnings as dividends (40% ordinary, 30% special dividend component). On our estimates, S32 is on a dividend yield of c. 11-13% in FY22 & FY23," it concluded.
