South32 heads north
Recommendation
South32's share price has jumped to $2.38 since a subdued close at $2.05 on its first day as an independent business. That near 20% increase is hard to explain but there are all sorts of shenanigans that mar the opening weeks of a large new listing.
We keep hearing that index managers in Australia are being forced to buy South32 because it is automatically a top 50 business. Yet index funds would already have owned BHP and had a proportional allocation to the spinoff. Index funds in London are likely sellers since the new miner is too small to sit within the London Stock Exchange's prominent indexes. It also lists in South Africa where a similar buy and sell game is being played.
That is without considering what smaller investors will do with their holding. Our experience with spin offs, especially smaller companies spun from giants, is that they are eventually dumped by retail investors, so future selling may still happen.
For long term investors, all this is irrelevant. Our reasons for owning South32 apply today regardless of what other investors are doing. We do, however, need to be wary of price.
The business now trades almost bang on net asset value and it is, in our view, fairly priced. The swift rise of the share price has forced a surprise downgrade. For members who haven't yet bought into South32 following our upgrade in What to do with South32 (Buy - $2.20), there is no need to chase the price higher. We think there will be a chance to pick the miner up at a discount to book value. For now, we're downgrading to HOLD.