Broker names 3 reasons the South32 share price could be cheap

South32 shares could be great value according to one leading broker…

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Key points

  • South32's shares have stormed higher over the last 12 months
  • One leading broker believes the mining giant's shares can keep rising
  • It has named three reasons for its bullish view on South32

The South32 Ltd (ASX: S32) share price is pushing higher on Tuesday.

In afternoon trade, the mining giant’s shares are up 1.5% to $4.46.

This means that South32’s shares are now up 50% since this time last year.

Can the South32 share price keep rising?

While the South32 share price has been flying over the last 12 months, one leading broker still sees scope for it to keep rising from here.

According to a recent note out of Goldman Sachs, its analysts have a conviction buy rating and $5.70 price target on the company’s shares.

Based on the current South32 share price, this implies potential upside of 28% for investors over the next 12 months.

But it gets better. Goldman believes South32’s free cash flow generation will be strong, allowing it to pay big dividends in the coming years. It is forecasting a fully franked 27.5 US cents per share dividend in FY 2022 and then a 47.3 US cents per share dividend in FY 2023.

Based on current exchange rates, this equates to 40 cents per share and 67 cents per share dividends, which represent yields of 9% and 15%, respectively.

Why is Goldman bullish?

Goldman Sachs has named three reasons why it is bullish on the South32 share price.

It commented:

Valuation: The stock is trading at c. 0.95x NAV (A$5.10/sh) including the completion of the acquisition of a 45% stake in the Sierra Gorda copper mine in Chile.

Strong FCF outlook: We forecast a FCF yield of c. 18% in FY23 (over 25% at spot), driven mostly by exposure to base metal price momentum.

Increased capital returns: We assume the buyback continues to be extended (at ~US$200mn p.a) and assume S32 resets its balance sheet metrics (we think targeting US$0-800mn net debt through the cycle based on our view of suitable balance sheet leverage) pays out 60% of earnings (40% ordinary, 30% special dividend component) with the FY22 result. On our estimates, S32 is on a dividend yield of c. 8-13% in FY22-FY24.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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