South32 Earnings: Lower Prices and Volumes Drive a Poor Result

No-moat South32’s first-half fiscal 2024 result was materially weaker than we expected. Adjusted net profit after tax of USD 40 million—USD 0.9 cents or AUD 1.4 cents per share—is down 93% on last year. Adjusted EBITDA roughly halved to about USD 710 million, driven by lower aluminum, nickel, and manganese prices and metallurgical coal sales volumes. While net debt of about USD 1.1 billion more than doubled in the half, at 0.6 times trailing 12 months EBITDA, it is manageable, and the balance sheet is sound. Around 75% of the increase reflected unfavorable working capital moves, mostly temporary, and the fiscal 2023 final dividend and first-half share repurchases. The company has canceled its buybacks to maximize its balance sheet flexibility given lower near-term commodity prices, which we think is sensible despite the shares being materially undervalued. While the USD 0.4 cent, about AUD 0.6 cents per share, fully franked interim dividend reflects materially lower earnings.