Rethinking Things

BHP Billiton posted FY17 operating earnings of US$20.3 billion and earnings before interest and tax of US$12.4 billion, within 1% of Ord Minnett’s forecasts, while net profit was a miss on higher finance expense.


Net debt of US$16.3 billion, implying 21% gearing, was the key positive, coming in materially below our estimate and consensus. A final dividend of US43c per share was declared, taking the full-year dividend to US83c per share (fully franked).


FY18 capital expenditure guidance sees total spending up to US$6.9 billion from US$5.2 billion in FY17, with a ceiling of US$8 billion for FY19–20.


Overshadowing the financials was the announcement that BHP will exit the US Onshore assets and delay the Jansen potash project. Strategically, these are two key issues that have been of major concern for the market, which the company now appears to be addressing.


BHP had announced a partial exit from shale, but the company has now confirmed it will target a full exit. After purchasing the assets for US$20 billion, the company has outlaid US$18 billion in capital expenditure, to make cumulative operating earnings of US$9 billion, implying the division still owes US$29 billion from the 2011–17 period.


The carrying value is now US$11 billion, versus our NPV measure of US$8.5 billion, which gives an indication of potential proceeds should a deal be executed. Proceeds would likely be used for capital management.


In regards to the Jansen potash project, BHP outlined in May that US$4.7 billion of incremental capital expenditure would be required to commence the mine at 4 million tonnes per annum in FY23, equivalent to an internal rate of return of circa 12%. The project will no longer be brought to the board for consideration in CY18, however, and we view the back-track as a positive given the project struggles to generate an acceptable return.


BHP is moving in the right direction strategically, in our view, but the stock continues to screen more expensive than Rio Tinto, which we rate at Accumulate. We maintain our Hold recommendation on BHP, but lift our target price to $26.00 from $25.00. 

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