Post a legal restriction, we resume coverage on HZL with a buy, TP R235. HZL’s valuations are highly correlated with zinc LME, it being an integrated producer with 45-60% margin range. 1) A neutral-to-bullish zinc outlook (less bullish vs. consensus) by our commodities team; 2) cash ~30% of mkt cap, 4% div yield (potentially higher based on FY16), 7-8% FCF yield; 3) potential buyout of the gov’t stake augur well. HZL trades at 6xSep17 EV/EBITDA (peers 8-9x, diversified ~6.5x). Citi’s 2017 LME forecast is $ 2,160/t; higher estimates on the Street range from $ 2,200- 2,700/t. Bull-bear spread R163-279. 1% chg in LME impacts EBITDA by 1%.
Investors have jumped on the mine closure story (Glencore’s price-driven closure in Oct15 + other depletionrelated closures); LME is up 40% YTD. The concentrate market has tightened, however with zinc prices higher now, it is arguable Glencore could bring assets back on stream.
HZL is a cash cow with FCF generation of $ 700 million pa + cash of $ 3.5 billion (30% mkt cap). Dividend payout was 20-30% in FY12-15. In FY16, HZL gave a special dividend R28/sh (170% payout).
We expect R8/sh in FY17 (50% payout). Ownership: gov’t 30%, Vedanta Ltd 65%. HZL maybe on the div yield radar for investors.
We value HZL at 8x Sep17 EV/EBITDA. We raise multiple from 6x earlier (Jan15) mainly due to: 1) more confidence since the last dividend (Mar16), and 2) global multiples moving up (from 6x to 8x).