UBS has revised its outlook on South32 Ltd (ASX:S32), elevating the stock rating to Buy from a previous Neutral stance while simultaneously raising the price target to 250p, up from 205p. This upgrade is underpinned by notable enhancements in South32's operational execution and an appealing risk-reward balance.
The investment bank highlighted South32’s robust results for the December quarter, which mark a continuation of progressive operational gains following a strategic simplification of the company's asset portfolio. UBS emphasized that nearly all South32 assets either met or surpassed expectations, with the company maintaining its fiscal year 2026 outlook and advancing key development projects as forecasted.
Reflecting the heightened confidence in South32's operational capabilities, UBS increased its enterprise value to EBITDA (EV/EBITDA) multiple forecast from 6.0x to 7.0x. The firm argues that, even at this revised multiple, South32 appears undervalued when compared to its ASX-listed counterpart Alcoa, which trades at a multiple exceeding 8.0x.
UBS expressed optimism about South32’s exposure to certain commodities, highlighting aluminum and copper as favorable components of its portfolio. Silver prices have surpassed UBS’s projections, suggesting potential earnings growth at the Cannington and Hermosa operations. As a result, earnings per share (EPS) estimates were raised by 35% for fiscal year 2026 and by 8% for fiscal year 2027.
In terms of free cash flow yield, South32 is projected to generate 6%, 8%, and 13% in fiscal years 2026 through 2028 respectively. UBS views these returns as attractive given the stock’s position near its 52-week peak, highlighting a possible upside to £3.25 per share compared with downside risk to £1.35.