BHP shows why it’s best-in-class
BHP delivers something for all in their 1H result with underlying profit up 39%, but take it with a grain of salt as net operating cash flow was only up 2% y/y, but issued a potential demand and outlook warning due to COVID-19:
“If the viral outbreak is not demonstrably well contained within the March quarter, we expect to revise our expectations for economic and commodity demand growth downwards. This caveat applies, to varying degrees, across our portfolio and we will continue to monitor. In this regard, we highlight the distinction between a permanent loss of demand in oil due to foregone transport services; and temporary demand losses with the opportunity to be reclaimed, as in steel and copper end-use.”
Despite this warning which on the surface looks terrible the overall BHP business did very well with ROCE of 19% which is exceptional for a business operating in the lowest part of the global supply chain with close to zero moat. The improved cash flow generation has allowed The Board to increase the ordinary dividend per share to $0.65 which was much better than the consensus estimate of $0.58 and the reason why investors were excited in Australian trading.
HSBC does the ‘kitchen sink’ exerciseHSBC reports shareholder profit that’s down 53% y/y driven by a large $7.3bn goodwill impairment. Shares are down 4% in London on earnings miss but also the fact that the bank is announcing to cut 35,000 employees over three years and reducing risk-weighted assets by $100bn sending the signal to the market of a negative structural view over the coming years. This is clearly still terrible to be a bank as central banks’ policies continue to pressure the net interest margin. HSBC is signaling an expected return on tangible equity of 10-12% by 2022 which underscores the difficulties to run a bank at profitable levels for shareholders.