BHP Group: Starting to make some moves
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 20 August 2020, 8:51 AM
- Sectors Covered:
- Mining, Energy
- Another strong year for BHP, with strong iron ore prices and capital discipline again combining for a healthy result, albeit just short of expectations.
- A fresh strategy (vision) under recently appointed CEO Mike Henry is starting to emerge with BHP announcing plans to reshape its asset portfolio.
- BHP plans to exit coal assets (BMC, NSWEC, Cerrejon), and also make changes to petroleum (sell Bass Strait, farm down equity across portfolio, and pursue accretive acquisitions of producing or near production assets).
- Unit costs are expected to rise in FY21 across iron ore, copper, met coal and petroleum. Dragging on FY21 upside potential.
- We maintain our Hold rating, viewing the big miner as fair value but holding an attractive yield profile and leverage to eventual recovery in energy resources.
Just shy of expectations
BHP delivered an FY20 result that was strong, but fell just short of market expectations. Underlying EBITDA of US$22.1bn (vs consensus US$22.2bn vs MorgansE US$22.8bn) down 3% pcp.
Meanwhile underlying NPAT of US$9.1bn (vs consensus US$9.4bn vs MorgansE US$9.7bn) was close to flat on the previous year.
A good outcome considering the operating environment.
BHP did flex its second half payout ratio, with a final dividend of US55 cents. EBITDA margin came in at 53% with gearing at low end of target range.
Fresh approach starting to emerge
Revealing a fresh strategy under recently appointed CEO Mike Henry, BHP announced plans to reshape both its coal and petroleum portfolios.
In coal, BHP is preparing to focus the business on high quality metallurgical coal, and as a result divest its interests in BMC, NSWEC and Cerrejon.
While in petroleum, BHP will sell its interest in Bass Strait (large but mature field), continue its work to farm down equity across its portfolio, and pursue new acquisitions of producing or near-production assets.
Keen to add more options in copper and nickel
BHP reiterated in the FY20 result that it is keen to add more growth options in future-facing metals copper and nickel, through exploration and early-stage acquisitions.
While making several good strategic moves, we question how BHP remains wedded to Olympic Dam (OD), with the large loss-making copper operation seemingly under pressure from BHP's "value over volume" and capital allocation process.
A future decision on OD would be made easier if BHP had more growth options in copper, another reason why we look forward to progress on this front.
Happy to hold
BHP is trading at the higher end of its historical EBITDA multiple range.
But unlike other cycles this high multiple is the result of investors rewarding the big miner for strong earnings fundamentals (53% EBITDA margin, 17% ROCE, FCF yield 7%, dividend yield 4%), where typically high multiples in resources is driven by commodity price weakness.
We view this dynamic as justified and supports BHP's market implied valuation.
As a result, and with BHP trading just ahead of our DCF valuation, we maintain our Hold rating (Morgans clients can login to view detailed reports and price targets).
The key risk to our call remains the potential for further economic weakness.
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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.