Overview
BHP Group Plc (BHP) is one of the world's renowned resource company. The company is engaged in the operations of extraction and processing of minerals, gas and oil. The company is having an employee base of 62,000, including contractors, mainly in the Americas and Australia. The company has two parent companies, BHP Group Limited and BHP Group Plc as it operates under Dual Listed Group Structure. The company is also engaged in the production of multiple commodities, which include uranium, metallurgical coal, iron ore and copper. The company’s operations are divided into four reportable segments being Coal, Iron Ore, Copper and Petroleum. The Coal business is involved in the mining of thermal (energy) coal and metallurgical coal. The Iron Ore business is involved in the iron ore mining process.  The Copper business is involved in the mining of gold, uranium, molybdenum, copper, zinc, silver and lead. The company’s operating model is divided into 3 businesses being Petroleum, Minerals Americas and Minerals Australia. The Petroleum operating assets are located in Macedon, Pyrenees, Angostura and Shenzi. The Minerals Americas operating assets are located in Escondida, Pampa Norte and Jansen. The Minerals Australia operating assets are located in Western Australia Iron Ore, New South Wales Energy Coal, Queensland Coal (BMA and BMC), Nickel West and Olympic Dam.

The current Chairman is Ken MacKenzie, who was appointed on 1^st September 2017. Andrew Mackenzie holds the responsibilities of the Chief Executive Officer and joined the group in 2008. Peter Beaven holds the responsibilities of Chief Financial officer.




Top Shareholders

 

Recent News

On 11th November 2019, Geraldine Slattery, President of BHP Petroleum Operations, gave Petroleum briefing to the shareholders. The BHP Petroleum is expected to deliver robust returns and will be a significant contributor to the BHP’s performance in FY2020. The Petroleum business is all set to deliver Return on Capital Employed (average) of over 15 per cent and robust EBITDA margins of over 60 per cent across the next decade.

On 7th November 2019, BHP group announced the selection of Ernst & Young as external auditor effective from 7th November post-resignation of KPMG.

On 1st November 2019, BHP group announced the approval of funding for BHP Billiton Brasil Ltda worth US$44 million for the restart of work at Samarco (Samarco Mineração S.A) related to the concentrator at Minas Gerais. The funding will help the completion of the filtration plant in the next 12 months.

Operational Performance

On 17th October 2019, BHP group announced the operational update for the quarter ending 30th September 2019. Driven by planned maintenance across natural field and operations for the period, the copper equivalent production declined by 3 per cent. The company expects a slightly higher volume for the FY2020 period as against the last year data. The company’s unit cost and production guidancefor FY2020 are expected to be the same and based on forex rate of USD/CLP 683and AUD/USD 0.70. The company in Trinidad and Tobagoapproved the development of Ruby oil and gasfor the period. All main projects under development are on track as planned. In South Australiabased Oak Dam, the company interceptshigh-grade minerals related to silver, uraniumand gold and confirmed for the second phasedrilling. The third phase of drilling is expected in November 2019.

Financial Highlights – Financial Year 2019 (30^th June 2019, USD, Million)


(Source: Annual Report, Company Website)
 
In the financial year ending 30th June 2019, the company’s revenue was at $44,288 million versus $43,129 million in the FY2018. The increase in revenue was driven by an increase in the revenue generated from the sale of copper. The company’s underlying EBITDA stood at $23,158 million in FY2019 versus $23,183 million in FY2018. The company’s operating profit was at $16,113 million in FY2019 versus $15,996 million in FY2018. The PBT (Profit before tax) for FY2019 stood at $15,049 million as against $14,751 million in FY2018. The Profit after tax (continuing and discontinued operations) for FY2019 stood at $9,185 million as against $4,823 million in FY2018. The Profit after tax attributable to shareholders (continuing and discontinued operations) surged by 124 per cent to $8,306 million in FY2019 from $3,705 million in FY2018. The basic earnings per share surged by 130 per cent to 160.3 cents in FY2019 from 69.6 cents in FY2018. The company’s diluted earnings per share stood at 159.9 cents in FY2019 versus 69.4 cents in FY2018. The basic earnings per share (continuing operations) stood at 166.9 cents in FY2019 versus basic earnings per share (continuing operations) of 125 cents in FY2018. The diluted earnings per share (continuing operations) stood at 166.5 cents in FY2019 versus diluted earnings per share (continuing operations) of 124.6 cents in FY2018. The company’s dividend per share was up by 13 per cent to 133 cents in FY2019 from 118 cents in FY2018. The group's net debt during the year declined substantially by 16 per cent to $9.21 billion in the financial year 2019 from $10.93 billion recorded at the end of FY18, and this reflects a strong free cash flow for the group.

Key Performance Indicators


Underlying Attributable Profit

Underlying Attributable Profit gives a more accurate indication of money generated by the business. The Underlying profit is an internal calculation and focuses on accounting cycle events which are regular in nature and excludes one-time charges or exceptional items. In FY2019, the Underlying attributable profit stood at USD 9.1 billion versus USD 8.9 billion in the financial year 2018.


Underlying EBITDA

Underlying EBITDA measures the company’s ability to generate cash as well as providing a useful measure of operating performance, excluding exceptional items. The underlying EBITDA (continuing operations) for FY2019 remained flat at USD 23.2 billion for the period. During the period, the adjusted EBITDA was benefited by favourable exchange rate movements, underlying improvements in productivity and higher prices and was offset by grade and field decline, higher strip ratios, inflation, the impact of weather and operational outages.

 
 
Net Operating Cash Flow
 
Net Operating Cash Flow is the difference between cash outflow and cash inflow for the period. It provides insights into how to increase productivity and manage costs. The BHP Group’s Net operating cash flows stood at USD 17.9 billion in the financial year 2019.


Credit Rating

Credit ratings give a forward-looking opinion related to the credit risk associated with the company. In FY2019, Moody’s upgraded BHP group credit rating to A2 as against A3 rating in FY2018. The other rating agency S&P (Standard & Poor’s) maintained A rating throughout the Financial Year 2019.

Financial Ratios 

 

The reported gross margin in FY2019 declined by 1.5 per cent to 80.4 per cent in the financial year 2019 versus 81.90 per cent in FY2018and stood higher as compared to the industry median. The reported EBITDA margin of 50.8 per cent for the FY2019 stood higher than the industry median of 16.1 per cent. The reported operating margin in FY2019 was down by 0.7 per cent to 36.4 per cent from 37.1 per cent reported last year for the same period. The reported Pretax margin of 34 per cent for the FY2019 stood higher than the industry median of 8.5 per cent. Net margin reported was 21.5 per cent for the financial year 2019, reflecting a decrease of 1.8 per cent when comparedwith last year data for the same period. Return on equity for the Financial year 2019 stood at 16.8 per cent, which was higher than the industry median of 11.4 per cent. On the liquidity front, BHP Group Plc’s current ratio was higher than the industry median of 1.81, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the BHP Group Plc’s was 0.53x, which was higher as compared to the industry median of 0.44x, reflecting that the company is more leveraged as compared to its peers.

Share Price Performance


Daily Chart as at November-13-19, before the market close (Source: Thomson Reuters)

On November 13, 2019, at the time of writing (before the market close, at 10:31 AM GMT), BHP Group Plc shares were trading at GBX 1,671.00, down by 1.50 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,078.50/GBX 1,417.35. At the time of writing, the share was trading 19.61 per cent lower than the 52w High and 17.90 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 4,789,452.40; 30 days – 4,949,128.63 and 90 days – 5,143,112.59. The average traded volume for 5 days was down by 3.23 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.41, reflecting higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £93.54 billion, with a dividend yield of 6.22 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)



To compare BHP Group Plc with its peers, Price/Cash Flow multiple has been used. The peers are BAE Systems Plc(NTM Price/Cash Flow was 12.59), Fresnillo Plc(NTM Price/Cash Flow was 8.06), Antofagasta Plc(NTM Price/Cash Flow was 6.96), Kenmare Resources Plc(NTM Price/Cash Flow was 5.11) and Glencore Plc(NTM Price/Cash Flow was 4.68). The Average of Price/Cash Flow (NTM) of the company’s peers was 7.48x (approx.)

Method 2: Price to Earnings Approach (NTM)

 

To compare BHP Group Plc with its peers, Price/Earnings multiple has been used. The peers are Fresnillo Plc(NTM Price/Earnings was 24.08), Anglo Asian Mining Plc(NTM Price/Earnings was 16.21), Kaz Minerals Plc(NTM Price/Earnings was 6.71), Kenmare Resources Plc(NTM Price/Earnings was 6.20) and Ferrexpo Plc(NTM Price/Earnings was 3.71). The Average of Price/Earnings (NTM) of the company’s peers was 11.38x (approx.)

Growth and Risk Assessments

The company has many value-accretive projects in the pipeline with low risk and higher production. The company’s asset base is capable of generating strong cash flows, helping the company to increase its petroleum and copper production in both the short and long term. With the expansion of new operations at Trinidad and Tobago and Southern Australia, the company has achieved higher growth rates in the industry. The ongoing trade war between the US and China has impacted the company’s performance.

Conclusion

The company had shown decent financial performance in the current financial year 2019 as compared to the same period of the last year. Both the top-line and the bottom-line performance have improved for the current period. The company has entered FY2020 period with strong positive momentum in terms of volume and cost.

The global economy has grown by 3¾ per cent in the calendar year 2018, with both the US economy and the Chinese economy showing growth. The company expects worldwide growth between 3¼ per cent to 3¾ per cent in the calendar year 2019 and this rate will help the company to deliver strong operational performance.

The Chinese economy is expected to grow by 6¼ per cent in the calendar year 2019, which will help the company to expand its operations in the Chinese region. The steel production has maintained strong growth in H1 of FY2019 globally. The company is rapidly expanding its operations in the US and China and is offsetting weakness in Japan and Europe.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from USD 28,567 million in FY16 to USD 44,288 million in FY19. Compounded annual growth rate (CAGR) stood at 15.74 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 1,664.80 (as on 13^th November 2019, before the market close at 11:27 AM GMT) with lower-double digit upside potential based on 7.48x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.) and 11.38x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.77837 GBP.

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