BofA update shows where active managers are putting money
On Wednesday, Citi analyst Paul McTaggart revised his stance on South32 (OTC:SOUHY) Limited (S32:AU) (OTC:SHTLF), downgrading the stock from Buy to Neutral. The new price target is set at AUD3.40, a decrease from the previous AUD3.70. McTaggart’s assessment comes amid a prolonged underperformance of the mining sector relative to the ASX200, with the sector trailing by over 30% since October 23, 2023. This decline has occurred despite a modest rise in the AUD commodity index.
McTaggart noted that while current valuations in the bulk commodities sector are compelling, trading at an average of 0.76 times discounted cash flow (DCF), caution is still advised due to persistent global growth risks. These risks are heightened by the phasing in of US tariffs and weakening demand signals outside of China. Although China’s support for the iron ore market remains robust, thanks to steady pig iron production and a more relaxed monetary policy, the trends in residential property and infrastructure in the country are inconsistent.
The tug-of-war between improving momentum in China and persistent global headwinds is expected to continue in the near term. McTaggart suggests that while investors may recognize long-term value in the sector, the current environment calls for a cautious approach. Reflecting this sentiment, Citi has adjusted its net present value (NPV) discount for South32 to 20%, up from 10%. This change is based on the expectation that shares will likely remain undervalued for an extended period due to subdued demand for metals outside of China.
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