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On Friday, UBS analysts revised their stance on South32 (OTC:SOUHY) Ltd (S32:LN) (OTC: SOUHY), downgrading the stock from Buy to Neutral and adjusting the price target to £1.90, down from the previous £2.10. The revision follows a period where South32 outperformed its peer BHP by approximately 20% over the past 12 months, with InvestingPro data showing a robust 20.5% total return over the past year and 9.19% year-to-date. According to InvestingPro’s Fair Value analysis, the stock appears slightly undervalued at current levels. The UBS team now views the risk-reward balance for South32 as even, given the company’s shift in focus from restructuring and cash returns to prioritizing organic growth.
According to UBS, South32 has demonstrated improved operational performance and possesses a robust balance sheet, which InvestingPro data confirms with a healthy current ratio of 2.83 and a conservative debt-to-equity ratio of 0.18. However, the analysts pointed out that the company’s growth prospects, particularly at the Hermosa project, are long-term and are somewhat negated by resource depletion at its Cannington site. InvestingPro subscribers have access to over 30 additional financial metrics and insights about South32’s financial health. They also noted that the projected cash returns for the next two years are less attractive, with a free cash flow (FCF) yield below 5% compared to the long-term average of around 8%.
The UBS team’s reassessment comes after South32’s first half of the fiscal year 2025 results, which prompted a slight reduction in earnings forecasts due to increased costs. Despite these factors, the analysts acknowledged the balance in commodity basket risk and highlighted that South32’s stock now trades at a valuation broadly in line with BHP, whereas it historically traded at a discount. InvestingPro data reveals encouraging signs, with revenue expected to grow by 39% this fiscal year, suggesting potential upside despite current challenges.
The downgrade and price target adjustment by UBS reflect a recalibration of expectations for South32, taking into account both the strengths and challenges the company faces. The analysts’ commentary provided insight into the factors influencing the revised outlook, including operational improvements, balance sheet strength, long-dated growth, and the comparison with industry peers.
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