BHP Billitons(LSE: BLT)spin-offSouth32 (LSE:S32) started its life as an independentpublic company today. After debutingin Sydney last night, from today investors can buy and sell their shares of thespin-offon the London Stock Exchange.
BHPs shareholders have received one share inSouth32 for each BHP share that they own. But should investors follow BHP and sell off their South32 holdings following the spin?
South32 received a lukewarm reception from investors on its trading debuton the Australian Stock Exchange. The spin-off began trading at the low end of the $2 to $3.50 rangepredicted by analysts, while BHPs shares fell by more than 5% in early trading in London as the shares began trading without the rights to South32.
South32 was created to house assets that BHP had labelled non-core. These includecoal, manganese,aluminiumand nickel mines and smelters.
And as a standalone company, South32 generated revenue of $8.3bn last year, making the company one of the worlds largest miners by revenue. South32s listing was the biggest IPO in Australia so far this century.
Still, while the BHP-South32 separation may have grabbed headlines for its size, the City is hardly optimistic about South32s prospects.
The Citys concern regarding South32s outlook revolves around twokey issues. Firstly, Chinas falling demand for key commodities, including coking coal,aluminiumandmanganese.
These three key commodities make up around 75% of South32s earnings before interest and tax. Although as demand is falling, the prices of these commodities are sliding. As a result, it is estimated that South32s earnings have fallen by as much as 47% over the past five months.
Falling earnings will put pressure on South32s dividend. The company has stated that it will pay out 40% of underlying earnings to shareholders every six months. Current projections indicate that this target will leave South32 with a dividend yield below the mining sector average of 4.2%.
For income investors then, South32 might not be the best choice. BHP could be a better bet. At present, BHP supports a dividend yield of 5.0%, although based on earnings forecasts for this year, the payout is only just covered by earnings per share.
If theres one issue thats preventing investors from taking a position in South32, its uncertainty.
BHP claims that it spun the business off to simplify its operations, but not everyones convinced. Until South32 shows that it can stand on its own two feet, the market will view the company with a degree of scepticism.
Still, there has been some chatter the South32 could become a bid target in the near future. Moreover, the group has been spun off with a relatively clean balance sheet, giving it room to expand. Management has hinted at the fact that the group could be looking to do some deals now the separation is complete.
So overall, what you decide to do with your South32 shares depends on your risk preference. If you’re willing to wait and see if South32 can prove itself, then you should hold.
However, if you’re an income seeker, it could be best to sell up and reinvest the proceeds back into BHP.
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