Returning US10.4bn to shareholders
In line with our forecast, BHP Billiton (BHP) will return the $US10.4bn in net proceeds from the divestment of its US onshore oil & gas business via an evenly split off-market share buy-back and special dividend. A timeline for the return program is outlined later in our detailed report (Morgans clients can login to view). BHP expects to introduce the off-market buy-back over the next two months, at up to a 14% discount to the five day VWAP of the BHP share price leading up to the close of the buy-back, after which BHP will go ex the special dividend (10 January 2019).
Why we still prefer BHP
So far this cycle, since early 2016, BHP has been our preferred large-cap mining exposure. This preference is based on a combination of:
- continuing exceptional free cash flow generation (+US$9bn in FY19);
- continuing capital management upside (ordinary dividend 6%);
- a highly competitive business (group EBITDA +50%);
- a truly diversified earnings streams (with four major earnings contributors by commodity); and
- further legs to the cycle (as demonstrated by the slow reaction in capex investment by industry).
Changes to estimates
As a base case we had already forecast that BHP would return the net proceeds from its 'shale sale' via a 50/50 split between share buy-back and a special dividend. While we had assumed payment of the special dividend during 2H'FY19, we were surprised by the quick timeframe BHP will execute the US$5.2bn off-market share buy-back. As a result we have updated our forecasts accordingly (Morgans clients can login to view our updated forecasts in our detailed BHP report).
Updating the timing and FX rate for the share buy-back has seen us increase our share price target slightly (Morgans clients can login to view). Rational supply-side investment in new supply growth across key commodities (across bulks and base metals) is, in our view, likely to prolong the current upcycle (that's not to say there will not be bouts of volatility).
We retain our Add recommendation.
Morgans clients can login to view our detailed report and share price target for BHP Billiton (BHP). Alternatively, please contact your nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
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