BHP Group: Pumped about potash

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
17 February 2021, 9:00 AM
Sectors Covered:
Mining, Energy

Key points

  • BHP Group (ASX:BHP) certainly had the ammunition for it, but we had not counted on the company paying out 85% of earnings for a record interim dividend in 1H21.
  • We are not concerned by the dividend exceeding FCF. As the big miner pointed out, it was a call based on net debt being at the low end of its preferred range.
  • BHP has hoisted potash into its circle of most preferred “future facing” commodities, along with copper and nickel. A powerful signal all but guaranteeing BHP's board will sanction Jansen Stage 1 in mid-2021.
  • 1H21 EBITDA was in line with consensus, albeit NPAT fell short of estimates.
  • Iron ore and petroleum were close to 1H21 consensus estimates. Coal disappointed in 1H21, while copper was ahead, largely offsetting each other.
  • We maintain our Hold rating with a revised target price (Morgans clients can login to view detailed reports and price targets).

The detail

Strong first half result

There was a lot to like about the 1H21 result, with EBITDA margin of 59%, group ROCE 24%, and net debt of US$11.8bn at bottom end of BHP's target range. 1H21 group EBITDA of US$14,680m +22% pcp was in line (vs consensus US$14,689m vs MorgE US$14,761m).

While underlying NPAT was below at US$6,036m +16% pcp (vs consensus US$6,331m vs MorgE US$6,419m).

Free cash flow was also strong at US$5,160m (vs consensus US$4,836m). While net debt remained at the bottom end of BHP's target range at US$11,839m (vs consensus US$12,162m vs MorgE US$12,227m).

Coal and copper offset

Disappointing in the result was the poor performance from BHP's coal businesses, with coal EBITDA of -US$201m, falling well short of the low end of consensus, while revenue was close to expectations.

Impacted coal volumes and a rising Australian dollar resulted in first half cost pressure.

This was however offset by another strong performance from BHP's copper business, with copper revenue (US$7,067m) and EBITDA (US$3,738m) ahead of consensus by 8% and 9% respectively.

Strong production from Escondida and a higher copper price supported a solid performance.

Flexes interim dividend

The highlight of the 1H21 result was BHP's decision to flex its dividend payout ratio to 85% (vs consensus 67% vs MorgE 60%).

Rather than basing its dividend decision on a measure of earnings or cash flow, BHP elected to pay a record interim dividend on a view that its net debt remained at the bottom of its target range of US$12-$17bn.

We do not expect gearing to increase meaningfully with strong cash flow ongoing and manageable near-term capex.

Investment view

BHP was notably more bullish on the outlook for commodities versus its last result in August, expecting a durable growth focus from policymakers in key consuming economies, population growth and increasing living standards, to continue supporting a strong price environment for commodities.

Post the 1H21 result we have revised our valuation (Morgans clients can login to view detailed reports and price targets).

On a TSR basis we see BHP as trading near fair value and maintain our Hold rating. The key risk to our call is macroeconomic (commodity demand drivers).

Find out more

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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.

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