BHP Billiton plc (NYSE:BBL) (LON:BLT)’s proposal to spin off its non-core nickel, manganese and aluminum businesses would unlock shareholder value and boost efficiency, note Sterne Agee analysts.

BHP Billiton

Josh W. Sullivan and team at Sterne Agee in today’s report note BHP’s proposal validates the analysts’ thesis on Alcoa Inc (NYSE:AA)’s sum-of-parts $22 price target.

BHP Billiton’s spin-off into A$20 billion company

One of the largest Aluminum producers BHP Billiton plc (NYSE:BBL) (LON:BLT) announced Monday that it is considering structural options as part of ‘simplification’ of its portfolio. The company was responding to reports that it could spin off non-core operations into a new A$20 billion company. As an alternative, the company may sell assets individually.

Though the company has not directly addressed the speculation that a de-merger to shareholders had become the preferred divestment route for the previously flagged sale of the non-core assets, BHP Billiton plc (NYSE:BBL) (LON:BLT)  didn’t dismiss it out of hand either. BHP said: “We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in free cash flow and a superior return on investment”.

Spinoff to enhance efficiency

In February BHP Billiton plc (NYSE:BBL) (LON:BLT) and Mitsubishi Corp announced that they would be firing 230 workers from an Australian coal mine as dropping prices, global oversupply and cooling Chinese demand force companies to reevaluate which of their mines are still viable.

The Sterne Agee analysts believe BHP Billiton plc (NYSE:BBL) (LON:BLT) would be able to unlock shareholder value and boost efficiency after disappointing investors the past few years. The analysts note the rationale for spinning off the assets comes down to capital allocation and the need to boost shareholder returns.

The Sterne Agee analysts point out that a larger peer such as BHP Billiton plc (NYSE:BBL) (LON:BLT) pursuing spin-off strategy lends significant credence to the analysts’ thesis / timing on Alcoa Inc (NYSE:AA). The analysts believe Alcoa’s current structure provides a compelling investment case for their near-term $15 price target. The analysts believe through a sum-of-the-parts analysis, significant shareholder value can be unlocked through re-rating segments. The analysts see the most efficient means to maximizing shareholder value as spinning off the Engineered, Products and Solutions (Downstream) segment to capture the peak valuations of the aerospace cycle, including a 0.35x Debt-to-Capital ratio.