South32 Restructure Fails To Convince Investors
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South32 will take an axe to its structure (and of course chop costs) after revealing it will boost returns to shareholders by more than previously promised this year, news that curiously saw the shares fall in what was a positive day for the wider market.
The results look to have fallen short of market expectations, with shares down 5.4% to $3.5 (mostly in the afternoon session)on a day when the wider market bounced strongly higher.
But really the shares fell because silly investors and analysts panicked at the new of cost rises (which South32 has been warning of noew for 9 months), and ignored the cost cutting move to revamp its structure.
It seems there is no pleasing the greedy among investors and analysts. Shareholders will be paid 7.3 cents a share in dividends, with 3 cents of that being a special dividend that will be 81% franked. That payment in effect more than doubled the interim payout to shareholders.
On top of this shareholders will get a bigger buyback over the rest of 2018.
South32 had been expected to return $US750 million to shareholders by October 10, this year, but said this morning that target would be raised to $US1 billion across higher dividends and share buybacks.
The company can afford that - it had net cash of $US1.4 billion at December 31, which was more than analysts had expected.
And yet the shares fell noticeably.
The revamp will see the company abandon its previous regional structure once the floatation of its South African coal assets is completed.
South32 said it would abolish the regional model in a bid to further streamline its workforce.
"Removing our regional structures will allow us to have more direct lines of communication, streamline our processes and further reduce duplication," the company said. The cost savings were left unmentioned.
The company posted a first-half statutory profit of $US543 million ($A685 million), down 12t% from the corresponding period last year when it had included a gain on non-trading derivative instruments.
Ignoring that, underlying earnings for the six months to December 31 were up 14% to $US544 million, as the miner benefited from stronger commodity prices.
Chief executive Graham Kerr said the company was well-positioned with cash on its books and volumes expected to increase marginally in the second-half.
“After a challenging start to the 2018 financial year, production for the majority of our operations is tracking on or ahead of schedule," he said yesterday.
South32 said higher realised prices for its commodities increased revenue by $US273 million, despite a significant reduction in coking coal and metal production at Illawarra Metallurgical Coal in NSW and Cannington operations in Queensland.
South32 has warned recently that cost pressures were rising in the resources sector, and the company confirmed that unit costs would be higher than previously expected at its Western Australian alumina, Northern Territory manganese, Illawarra coal, Cannington base metals, Colombian nickel and South African coal operations.
That’s why the shares fell - fear of the unknown rather than the expected surge in shareholder returns this year.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.