South32 Ltd (ASX: S32) shares are rising on Tuesday.
In morning trade, the mining giant's shares are up 1.5% to $3.78.
However, the South32 share price remains down 20% over the last six months.
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Are South32 shares good value?
According to a note out of Goldman Sachs, its analysts believe that investors should keep their powder dry for the time being.
In response to its quarterly update release on Monday, the broker has downgraded South32 shares to a neutral rating and cut the price target on them by 10% to $3.70.
While South32's operational performance was improved during the quarter, it was still short of the broker's expectations. It said:
S32's June Q result was much improved post the 5 or so negative one-off events in the March Q, but was still weaker than expected with lower alumina & zinc production and lower June H realised commodity prices vs. GSe (except for alumina).
Valuation not compelling
Although Goldman certainly isn't in a rush to sell South32 shares, it just doesn't see enough value on offer to recommend them as a buy. It adds:
Trading at ~1xNAV (A$3.75/sh) vs. peers BHP/RIO at 0.95x/0.85x NAV and on NTM EV/EBITDA multiple of 4.3x vs. the sector average of ~4.5x and on TSR of 0% vs RIO and BHP on 16% and 7%.
In addition, the broker appears to have a few concerns over its free cash flow outlook based on spot prices. If prices don't improve, it could mean South32 falls short of its dividend expectations in FY 2024. It said:
We forecast FCF/dividend yield in FY24 of 10%/6% (but just 3%/2% at spot mostly due to low spot alumina and aluminium prices) vs. peers BHP and RIO average at 6%/5%, EPS MtM downgrade by ~50% at spot for FY24, and with -2%/0% CuEq production growth in FY24/25 vs. RIO and BHP with 5%/3% and 4%/2%.
