BHP Group: Pushes its advantage
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 17 August 2022, 8:00 AM
- Sectors Covered:
- Mining, Energy
- Strong result with a final dividend beat.
- BHP continues to show it is better positioned than most (all?) of its peers.
- One of our key reporting season picks, we view the dividend/FCF surprise and resulting re-rating as justified.
- We maintain our Add rating (clients login to view target price).
Strong result in uncertain times
A strong result from BHP, with earnings slightly ahead of expectations while positively surprising on both dividend and free cash flow (FCF) generation.
The dividend surprise was the key highlight, which also drove a positive share price reaction on result day. BHP announced a US175 cent final dividend, ahead of both consensus US152 cents and MorgansE US136 cents.
FY22 FCF of US$24.3bn was +US$4.8bn vs consensus. Driven by US$3bn of FY22 tax which BHP will pay during FY23 (so more a timing factor) and lower Australian dollar and Chilean peso helping both opex and capex cost savings.
Underlying EBITDA of US$40,464m (vs consensus US$40,277m vs MorgansE US$40,004m) was 1% ahead of expectations. While underlying EPS (ex-Petroleum/BMC) of US421 cents was also just ahead (vs consensus US413 cents vs MorgansE US417 cents). Giving BHP robust group ROCE of 48%(!)
The big news besides the dividend was the ~US$9.2bn increase(!) in coal EBITDA (US$9.5bn in FY22 vs just US$288m in FY21). This growth was more than enough to plug the gap created by lower iron ore prices during the year (-US$4.6bn), with iron ore EBITDA declining to US$21.7bn (vs US$26.3bn in FY21).
BHP's net debt plummeted to US$333m, before its US$8.9bn final dividend.
Analysis
BHP heavily emphasised organic growth in the FY22 result. We believe this was aimed at helping the market 'refocus' and put M&A back in perspective as bolt-on and opportunistic (not transformative or essential). This appears a necessary message as investors (especially analysts) can become a bit 'M&A crazy' once the scent of any potential deal is picked up. That's not to say BHP won't still pursue OZL, but its primary focus on its larger organic profile should not be forgotten.
Worth more analysis is the medium-term (FY25-FY27) capex profile of ~US$10bnpa BHP presented. This sits well above our estimates and consensus. Although not all bad news with only ~US$1bnpa of the capex increase associated with higher maintenance.
The rest of the increase was attributed to either organic growth (which could include projects like Jansen Stages 1 & 2, Escondida/Pampa Norte concentrator strategy/leaching, Olympic Dam/Oak Dam 2-stage smelting, iron ore 300+, etc.) or “improvement” spend (debottlenecking, modifications, etc.). While we have not factored in the above capex/projects (outside of Jansen), we also have not included the value and growth it would likely deliver.
The new growth targeted for BHP's West Australian Iron Ore (WAIO) business, first to “300+ mtpa” and then 330mtpa, was refreshing. BHP had previously ruled out expanding beyond 310mtpa given the required capex, but it now believes it might be able to grow to that level without major rail spend (most capital intensive area of iron ore development). Studies to 330mtpa are expected to be delivered in FY25.
Potash remains a key source of growing optimism. It was clear from the result briefing that BHP's conviction for the potash market and its Jansen project have grown. BHP expects supply from key sources Russia and Belarus to remain impacted in the long term, which could unlock more than just Jansen Stage 1 & 2.
Forecast and valuation update
We have made various changes to FY23/24 opex and capex mostly aligned with guidance, especially increasing FY23/24 copper capex. We have also lifted our LT potash price to US$375/t (from US$300/t).
Investment view
Our long-term preference for BHP over RIO continues to pay dividends (literally), with BHP asserting itself as the better miner and with the stronger growth profile. We maintain our Add rating with an updated target price (Morgans clients login to view).
Risks
COVID, geopolitical, and general macro risks to key metal demand drivers.
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