Category: Financial Markets

Investment Thesis 

• Based on blended valuation (consisting of DCF, PE-multiple & EV/EBITDA multiple), BHP is trading at fair value but on an attractive dividend yield.
• Commodities prices especially iron ore prices deteriorate on lower demand from China.
• Focus on returning excess free cash flow to shareholders in the absence of growth opportunities (hence the solid dividend yield). 
• Quality assets with competitive cost structure and leading market position.
• Growth in China outperforms market expectations.
• Management’s preference for oil and copper in the medium to long-term.
• Solid balance sheet position.
• Ongoing focus on productivity gains.

Key Risks

• Poor execution of corporate strategy.
• Prolonged impact on demand if coronavirus is not contained.
• Deterioration in global macro-economic conditions.
• Deterioration in global iron ore/oil supply & demand equation.
• Deterioration in commodities’ prices.
• Production delay or unscheduled site shutdown.
• Movements in AUD/USD.

1H22 Results Highlights Relative to the pcp: 

• Earnings and Margins: Attributable profit of US$9.4bn includes an exceptional loss of US$1.2bn (which mainly accounts for Samarco dam failure of US$821m as well as an impairment of US deferred tax assets no longer expected to be recoverable after the Petroleum demerger of US$423m). This was significantly above 1H21 profit of US$3.9bn, which included an exceptional loss of US$2.2bn. Underlying attributable profit of US$10.7bn was much improved from US$6.0bn in the pcp. Profit from operations (continuing operations) of US$14.8bn was up +50%, due to higher sales prices across BHP’s major commodities, near record production at WAIO and higher concentrate sales at Spence, and favourable exchange rate movements; partially offset by impacts of planned maintenance across several assets, expected copper grade decline at Escondida, significant wet weather at Queensland Coal and inflationary pressures, including higher fuel, energy and consumable prices. Total Covid impacts was US$223m (pre-tax) versus US$405m in 1H21. Underlying EBITDA (continuing operations) of US$18.5bn, was up +33%, as margin of 64% improved from 60% in 1H21. Underlying return on capital employed improved to 39.5% from 23.6% in 1H21 (underlying return on capital employed, excluding Petroleum, is ~42.9%). 

• Costs. BHP’s FY22 unit cost guidance for WAIO and Escondida remains unchanged whilst for Queensland Coal, it was increased, reflecting lower expected volumes for the full year as previously announced. At 1H22, unit costs at WAIO are below guidance and are tracking towards the lower end of the guidance range. WAIO unit costs (C1) excluding third party royalties, were 18% higher at US$14.74 per tonne, driven by higher diesel prices and costs relating to South Flank ramp up. Escondida unit costs were at the top end of the guidance range, driven by planned lower concentrator feed grade. Queensland Coal unit costs are tracking above the revised guidance range as BHP saw lower volumes due to significant wet weather impacts and labour constraints. 
• Balance Sheet: BHP’s balance sheet remains strong with gearing of 10.0% versus 6.9% in the pcp, and with net debt at US$6.1bn versus US$4.1bn in the pcp. The increase of US$2.0bn in net debt reflects strong free cash flow generation, offset by the record final dividend paid to shareholders in September 2021 of US$10.0bn. Following a review of the net debt target, BHP also revised the range to between US$5-15bn from the previous target range of between US$12-17bn. 
• Dividends: The Board declared a record interim dividend of US$1.50 per share or US$7.6bn, including an additional US$2.7bn above the minimum payout policy. This equates to 78%. 
• Capex: Capex of US$3.7bn in 1H22 covers US$1.1bn maintenance expenditure, US$0.1bn minerals exploration and US$0.8bn petroleum expenditure. BHP expects FY22 capital and exploration expenditure of ~US$6.5bn (continuing operations), which is US$0.2bn lower than previous guidance due to favourable exchange rate movements. 

Company Profile

BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.

 (Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.