BHP is strong heading into reporting season: Overweight

Eleanor Creagh

Australian Market Strategist, Saxo Bank Group
Eleanor Creagh joined Saxo Bank Group in 2018 and serves as the bank's Australian markets strategist, responsible for creating, implementing, and monitoring equity strategies and research for traders and investors, as well as developing quantitative models and customised mathematical frameworks for institutional clients.

BHP’s quarterly production outlook was strong overall. Copper, petroleum and coal were all at the top end of analysts' estimates with solid volumes. For this quarter iron ore production was up 10% to 63.6m tonnes, exceeding analysts’ estimates for output numbers of 60m tonnes. Total iron ore production for 2018 financial year increased 3% to a record 238 million tonnes. This was accompanied by a new target set to lift output further in 2019. Heading into the Aussie reporting season, we are constructive on the outlook for BHP. The company will report on August 21, 2018 and analysts currently estimate a 25% YoY growth in EPS, with positive upside revisions of 2.5% in the last month. 

BHP has made numerous changes to its business since the last commodity down-cycle that it is unlikely to reverse in the event of changes in cyclical conditions now. Unit costs have been lowered across the business, technological innovation and automation has been implemented company wide. This is not just pertaining to driverless trucks but end-to-end integrated systems ensuring operational efficiencies and standardised work practices. The aforementioned combined should contribute to further declining unit costs across the business. 

BHP is not launching any new greenfield exploration in iron ore (or metallurgical coal) and is not looking to expand production scale. The South Flank mine was recently sanctioned to replace existing production that is nearing the end of economic life. The approach is in line with the current strategy of sustaining greater discipline when deploying capital and is prudent given China's steel industry changes/closures. This corroborates the view that BHP is maintaining its promise to avoid cycle traps and retain robust free cash flow, giving it a competitive edge against other large miners like RIO and S32. Both RIO and S32 have not had the same discipline in the face of rising earnings, eg lithium investments in Siberia and zinc mining investments are unlikely to be counter cyclical plays. 

Obviously an important issue for global miner BHP is the rising threat of protectionism amongst key consuming countries. Iron ore demand is firmly linked to Chinese demand. And this is where the real uncertainty is coming from as the latest figures out of China have pointed to a slowdown in growth momentum. However, there is nothing like a China fiscal stimulus package to rev up commodities. 

The China easing bias is firmly in place – we have had three reserve ratio requirement cuts this year, we saw a record medium-term lending facility liquidity injection on Monday, then on Tuesday the fiscal stimulus package including 65 billion yuan in tax cuts, expanding the preferential policy for small firms to all firms plus an infrastructure spending package all aimed at boosting domestic demand. All this signals a policy shift towards easing and looking at the State Council Meeting statement confirms that, as the “neutral monetary policy” phrase was dropped. So we have the double barrelled fiscal and monetary easing which is likely to support growth momentum in China for the time being, curbing downside risks. 
 
Another consideration – if the Chinese market has passed its peak in terms of infrastructure development, there are other South East Asian countries that in comparison will see stronger demand in coming years. Specifically, countries along the belt and road initiative, Indonesia, Vietnam, Bangladesh are now seeing strong demand and have only just begun nationwide construction of highways, ports, power stations and other public infrastructure. Additionally, the Indian government has set its steel production target for 2030 at 3 x higher than last year’s 97 million tonnes of steel, thus supporting the longer-term outlook for BHP. 

BHP currently has a robust balance sheet, as earnings have remained elevated it has  stayed disciplined and focused on long-term strategy to grow the company. The exit of the US shale business, selling assets to BP for more than $10bn, will also return cash to their balance sheet and lower the P/E and remove nearly all net debt. These value enhancing strategies are creating free cash flows which we expect to flow through to higher dividends and buybacks, rewarding investors. FY19 EV/EBITDA 5.7x is below the global average of 11.7x so the stock is not expensive compared to global equities, combined with a 5% dividend yield. BHP’s current uptrend is likely to continue heading into reporting season.

Source: Bloomberg

Access both platforms from your single Saxo account.

Disclaimer

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice or a personal recommendation and does not take into consideration your objectives, financial situation and needs. Saxo Capital Markets UK Limited will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information. We assume no liability for errors, inaccuracies or omissions contained within these materials.

It is important that you understand that with investments, your capital is at risk. We offer leveraged products which carry risk and can result in losses that exceed deposits. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more here.

Additional Key Information Documents are available in our trading platform.

Saxo Capital Markets UK is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871

Please read our full disclaimer - https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer