BHP Group: Growing conviction on weakness

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

20 July 2022, 2:20 PM

Sectors Covered:

Mining, Energy

• A bout of volatility amongst commodities has seen BHP’s share price come under some pressure, declining over the last quarter in line with peers.
• BHP delivered a solid 4Q22 operational result and unit cost performance, although the FY23 guidance set looks soft versus current consensus expectations.
• Post sell off BHP offers robust fundamentals and dividend profile. We maintain our Add rating with an increased target price (clients login to view).

4Q22 snapshot

• Healthy end to FY22. Iron ore shipments of 64.2mt in 4Q22 were steady on the pcp (vs consensus 64.7mt vs MorgansF 65.3mt). Copper production of 461kt was just ahead (vs consensus 451kt vs MorgansF 457kt) and +15% pcp, with copper carried by a solid result at Escondida. Thermal coal output from NSWEC impressed at 3.9mt (vs consensus 3.5mt vs MorgansF 3.5mt) -38% pcp. Met coal volumes disappointed, with BMA impacted by heavy rains that saw 4Q22 production of 9.94mt (vs consensus 10.6mt vs MorgansF 10.9mt) -31% on pcp. Nickel also trailed at 18.8kt -16% pcp.
• Costs mostly on track. No change to FY22 unit cost guidance for iron ore and copper, while BHP expects NSWEC unit costs to come in at the bottom end of guidance and met coal unit costs just above.
• Potash. BHP confirmed it was pulling forward Stage 1 development of its Jansen potash project to 2026, which is already reflected in our forecasts given previously flagged. BHP is also looking at possibly accelerating Jansen Stage 2 development.
• One-offs. BHP flagged a number of exceptional items for next month’s FY22 result, including over US$9bn in net gains from divested oil & gas and thermal coal assets.

FY23 guidance softer vs consensus

• BHP set FY23 production guidance, which looked soft versus existing consensus, which mostly sits at the high end of the new guidance across the business.
• Iron ore (WAIO) FY23 guidance of 246-256mt is on the lower side versus Visible Alpha consensus of 254mt. FY23 group copper guidance of 1,635-1,825kt also looks light against consensus of 1,818kt, while met coal, thermal coal and nickel guidance was also low versus existing consensus estimates.

Forecast and valuation update

• We have adjusted our FY22 estimates for guided one offs to P&L and cash flow.
• Increased FY23-FY24 iron ore unit cost to US$20/t (from US$18-19/t). Escondida FY23-FY24 unit cost to ~US$1.40/lb (from US$1.35/lb). Lifted BMA unit cost assumptions US$106/t in 2H22 and US$103/t for FY23 (from US$88/t).
• Applied higher house coal forecasts for HCC: FY23 now US$310/t (was US$213/t) and FY24 now US$213/t (was US$165/t) and thermal coal: FY23 now US$240/t (was US$103/t) and FY24 now US$135/t (was US$77/t).
• Net of these changes, and a roll forward of our model, our valuation-based target price is slightly changed at A$48.50 (was A$48.30).

Investment view

• While the next 2-3 months hold uncertainty, particularly around the rate of growth in key commodity consumer China, we continue to see healthy fundamentals for iron ore, coal and base metals heading into 2023. This in leaves BHP’s share price looking attractive at current levels.
• Supported by an FCF yield of 13%, dividend yield of ~10% fully franked, and trading at a ~30% discount to our target price, we see BHP’s share price as having drifted into attractive value territory. Maintain Add rating with an increased target price (login to view).

Price catalysts

• 2H22/FY22 financial result and dividend announcement 16 August.

Risks

• COVID-related risks to demand drivers for metals. Execution risk on Jansen

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Disclaimer: 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.