BHP Group reported underlying earnings of US$9.1bn, in line with Ord Minnett’s US$9.2bn forecast but 3% below consensus. Net debt of $9.2bn was in line with market estimates and lower than our forecast. The company’s net debt target of US$10–15bn was raised to US$12–17bn to reflect the inclusion of leases on the balance sheet, in line with the latest accounting standards. A fully franked final dividend of US78cps was declared, versus our US75cps estimate and consensus of US79cps, taking the full-year payout to US$2.35 per share.
Cost guidance for FY20 was broadly as expected, with Western Australia Iron Ore at US$13–14/t, Queensland Coal at US$67–74/t and Escondida at US$1.20–1.34/lb. Management noted, however, that sustainably achieving a 290Mtpa run rate from the Pilbara operation was a medium-term (within five years) target, with ongoing maintenance programs likely to reduce utilisation in the near term.
FY21 capital expenditure guidance of US$8bn included unapproved project spending, along with a Jansen Potash project allocation, while a 290Mtpa run rate from the Pilbara is now a medium-term target, highlighting the impact from ongoing maintenance.
We have lowered our FY20 earnings forecasts by 2% after reconciling the FY19 result and making minor adjustments for FY20.
BHP is beginning to look more appealing from a valuation standpoint, with the stock trading on a 0.93x price to net present value multiple and offering an FY20E dividend yield of 6.8%. However, Rio Tinto (RIO, Buy) continues to screen as more attractive. We maintain our Hold recommendation on BHP with a $39.00 target price.