If you’re looking for options in the resources sector then you may want to take a look at the South32 Ltd (ASX: S32) share price.
This is because this mining giant has been named as one of the best options for investors in the sector by the team at Goldman Sachs.
Is the South32 share price good value?
Goldman recently named four reasons why Fortescue Metals Group Limited (ASX: FMG) could be a sell, you can read about that here.
Whereas on this occasion, the broker has named four reasons why the South32 share price is in the buy zone.
According to the note, the broker has a conviction buy rating and $4.60 price target on the miner’s shares. This implies potential upside of over 12% before dividends.
And if you include the very generous dividends Goldman is forecasting in FY 2022, the potential total return increases to over 23%.
Why is the broker bullish?
The four reasons that Goldman is bullish on the South32 share price are its valuation, strong free cash flow outlook, increased capital returns potential, and positive project news flow.
In respect to its valuation, the broker notes that the miner’s shares are trading at an attractive 4x forward EV/EBITDA excluding the yet to complete acquisition of a 45% stake in the Sierra Gorda copper mine in Chile.
As for its free cash flow, the broker commented: “We forecast a more than doubling in EBITDA in FY22 and a compelling FCF yield of c. 18%/17% in FY22 & FY23 (over 20% at spot), driven mostly by exposure to base metals (aluminium & alumina c. 50% of FY22 EBITDA zinc/nickel c. 20%), and the restart of the Alumar aluminium smelter in Brazil & recent acquisition of a minority stake in the Mozal aluminium smelter in Mozambique.”
A third reason to be positive is the prospect of capital returns. Goldman explained: “We assume the buyback continues to be extended (at US$250mn p.a) and S32 continues to pay out 70% of earnings (40% ordinary, 30% special dividend component). On our estimates, S32 is on a dividend yield of c. 11-12% in FY22 & FY23.”
Finally, Goldman notes that there is positive project news flow on the horizon which could boost the South32 share price.
It said: “We highlight the potential for capex on the US$800mn Dendrobium next domain (DND) met coal project to be reduced (which we would view as a positive). S32 is currently selling a base metal royalty portfolio (no value in our model).”
The post 4 reasons Goldman says the South32 (ASX:S32) share price is a conviction buy appeared first on The Motley Fool Australia.
Should you invest $1,000 in South32 right now?
Before you consider South32, you’ll want to hear this.
Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and South32 wasn’t one of them.
The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.
*Returns as of January 13th 2022
More reading
- These ASX shares could be buys for value investors
- Leading fund manager says these blue-chip ASX shares are buys right now
- 5 things to watch on the ASX 200 on Tuesday
- Why Beforepay, Firefinch, Kogan, and South32 shares are dropping
- ASX 200 (ASX:XJO) midday update: Wesfarmers’ update, energy shares rise
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 Bruce Jackson.
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