BHP Group: Stays conservative
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 19 February 2020, 1:15 PM
- Sectors Covered:
- Mining, Energy
- Despite reporting no direct impact on demand, sales, deliveries or payments stemming from the Coronavirus, BHP decided to remain conservative by not flexing its H1 dividend and keeping gearing at the low end of its target range.
- H1 underlying NPAT of US$5,186m was in line with consensus (US$5,277m).
- Keeping its payout ratio at 64% in H1, BHP announced a USD 65 cent interim dividend (vs consensus USD 82 cents).
- A trade war re-escalation and contained Coronavirus scenario would see China GDP decline to 5.75% (with a low Coronavirus scenario would see 5.25%). Facing a number of H2 top down uncertainties and trading near our target, we maintain our Hold rating on BHP (Morgans clients can login to view detailed reports and price targets).
Measuring largest top down uncertainties
CEO Mike Henry commented during the result briefing that the big miner has not seen any direct impact to demand, sales, deliveries or payments stemming from the Coronavirus-led suspension of large parts of China’s economy.
BHP went further to comment that it has actually seen increased interest in BHP products following “supply issues” experienced by others (leaving us interested to see if BHP’s smaller seaborne peers report a larger virus impact).
As things currently stands, BHP expects the majority of China’s economy will be back ‘online’ by February end. Against this backdrop, BHP’s current low-case scenarios for China are:
- a re-escalation of China-US trade war and containment of Coronavirus by March end (which would see China GDP of 5.75%)
- trade war re-escalation and longer Coronavirus outage.
Meanwhile further instability in Chile also remains on BHP’s radar.
Too early to measure any direction changes
On the result call, new CEO Mike Henry was immediately questioned on several long-run issues at BHP (commitment to Jansen, petroleum, decarbonisation, Scarborough, Olympic Dam and its dual-listed (DLC) structure).
While some had easy questions (petroleum to stay, Scarborough a ‘yes’, and DLC not worth removing) some other important issues will understandably take some time for BHP’s new CEO to work through and any new strategies revealed.
Strong first half earnings
BHP reported H1 underlying NPAT of US$5,186m, in line with consensus (US$5,277m) while ahead of our forecast (US$6,192m). While solid H1 cost performance and flat volumes saw group EBITDA margin of 54%, also in line with consensus. FCF generation meanwhile fell short of expectations at US$3.7bn (vs consensus US$4.5bn).
With a number of global uncertainties, BHP remained conservative with its balance sheet and maintained gearing at the bottom end of its 12-17% target range.
Maintain Hold recommendation
Healthy first half earnings and dividend, with BHP still expecting iron ore prices to average lower.
We continue to view BHP’s low capex requirements across its business as remaining supportive of an elevated dividend profile.
Post changes for the result, oil price forecast, H2 Escondida cost cut, and petroleum D&A increase our valuation-derived target price has been revised (login to view).
We maintain our Hold rating.
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