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Credit Suisse runs numbers on South32 buyback, M&A options

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Should South32 use its strong balance sheet to buy back shares or make acquisitions?
It's the big question investors are asking heading into the miner's maiden full-year result on August 24.
Credit Suisse analysts chimed into the debate on Friday morning, running the numbers on a $US1.5 billion ($2.04 billion) share buyback and potential acquisitions including Whitehaven Coal and OZ Minerals.
The analysts reckon a $US1.5 billion on-market buyback worth 15 per cent of the miner's issued equity and run over the next two years, would be 16 per cent accretive to 2018 financial year earnings per share.

They also said it would see South32's gearing increase to 17 per cent, while 2017 financial year end net debt would be $US2.3 billion.

As for potential acquisitions, Credit Suisse said the leading Australian candidates were Whitehaven and OZ Minerals given their large, long-life operations.
Credit Suisse said an all cash $1.40 a share offer, pitched at a 40 per cent premium to Whitehaven's trading price, would be 17 per cent accretive to South32's earnings per share in the 2019 financial year.
"We'd argue that the mathematics works from a theoretical perspective," the analysts told clients.

"Whether the major shareholders of WHC would agree is another matter and noting that Farallon and AMCI associates hold ~60% of the shares. Would A$1.40/sh be enough to get these WHC shareholders over the line? We are not all certain it would be. Given the pretty compelling numbers around a buy-back, we can't imagine that S32 would be prepared to pay any more than $1.40."
As for OZ Minerals, the analysts said any acquisition would take some years to pay off. Credit Suisse said an all-cash offer for OZ Minerals at a 40 per cent premium to its current trading price would be 15 per cent accretive to 2022 calendar year earnings per share.
Credit Suisse reckons South32 could do both a buyback and an acquisition.
"Opportunity beckons and let's hope S32's management team is fleet of foot enough to take advantage of the opportunities these difficult commodity markets have thrown up. To us, WHC looks like a much easier potential acquisition. The technical risk is low and it's immediately cash generative," the analysts said.


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