- A weaker-than-expected 2Q operational result, although BHP expects a big 2H.
- BHP flagged lower iron ore and copper volumes which saw unit costs rise above FY19 guidance, although it expects this to moderate over the year.
- Petroleum was the highlight, outpacing our estimates, with BHP now expecting to come in at the upper end of guidance for FY19.
- BHP's investment case remains supported by its robust fundamentals, from quality of earnings to balance sheet strength and combination of market exposures.
Weaker 1H but little change to FY19 outlook
A combination of planned maintenance and unexpected outages across BHP's WA iron ore operations (WAIO), and the Spence and Olympic Dam copper operations contributed to a 2Q operational result that mostly trailed our estimates, with 2Q iron ore production of 58mt (vs Morgans 60mt) and copper 416kt (vs Morgans 432kt).
Petroleum was the highlight, with BHP producing 30mmboe (vs Morgans 27mmboe), with BHP now expecting its full year numbers to come in at the upper end of its 113-118mmboe guidance.
Unit costs above guidance in 1H
Also flagged in its 2Q result the lower volumes produced across its operations had resulted in unit costs being above guidance levels during the first half. Although the big miner left FY19 cost guidance unchanged with expectations it can catch up in the second half.
BHP added copper volumes from its Cerro Colorado operations back into group FY19 guidance after its sale was terminated as the purchaser failed to satisfy financing conditions. Guidance outlined further in our detailed report (Morgans clients can login to view).
Hard to pick a hole in fundamentals
Strong iron ore and coal prices have helped push BHP to a spot FCF yield of 9.2%, a peer leading group EBITDA margin of 53%, gearing at healthy levels hovering around 15%, and the prospect of recovering oil and copper prices later in 2019. Meanwhile BHP's investor day late in 2018, where it presented its strategy and commodity teams, reaffirmed to us the robustness of its strategy and the demands it places on the capital it deploys.
We view BHP as an obvious pick for those seeking resources exposure.
The weaker-than-expected 2Q is likely to lean on the 1H result next month, however the outlook for FY19 remains little changed with BHP expecting a big 2H.
After updating our model for the result, our valuation-derived share price target has reduced slightly. We maintain our Add recommendation, with a healthy ordinary dividend profile expected (while commodity prices remain at or above sustainable levels) and the ongoing prospect for further capital management.
The key risk to our call is commodity price risk.
Morgans clients can login to view our detailed report and revised share price target for BHP Group (BHP). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
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