Investment Summary
 

(a) The company has reported a robust operational and financial performance historically.

(b) Historically, distributed its earnings in the form of dividends to its investors with high dividend yields.

(c) Share price currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.

(d) The group has a diversified portfolio in terms of commodities and geographies, which minimizes its risk elements.
 

Business 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 in Macedon, Pyrenees, Angostura and Shenzi. The Minerals Americas operating assets are in Escondida, Pampa Norte and Jansen. The Minerals Australia operating assets are in Western Australia Iron Ore, New South Wales Energy Coal, Queensland Coal (BMA and BMC), Nickel West and Olympic Dam.

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

Standout Performer


(Source: Interim Presentation, Company Website)

The Group has created value and provided returns to its investors in the long term. Its high performing assets, safe operations, future potential and continuous improvement in operating margins makes this company an attractive opportunity for the investors.

Company Strategy

The company focus on to have the best capabilities, best commodities and best assets to create long-term value and high returns for the stakeholders. The Group’s strategy can be described in three points:


(Source: Interim Presentation, Company Website)
 

(a) Its Culture and capabilities that enable it in the execution of its business.

(b) Highly attractive commodities portfolio with high economic rent potential.

(c) Competitive assets that are strong through the entire cycle which embedded growth options and enhanced the company’s capabilities.
 

Investment Propositions


(Source: Interim Presentation, Company Website)

These can be described in three parameters:
 

(a) Its low cost production, increase in volumes and decent outlook maximise its cash flow generation.

(b) Its capital structure which provide opportunity to grow organically.

(c) Consistent value creator and provides returns to its investors.
 

Market Outlook


(Source: Interim Presentation, Company Website)

The company is cautious about the outlook for its key commodities in short term but expects positive demand in the long-term. Over the next 12 months, risks and uncertainties would be there with the duration and intensity of Covid-19 a major source of uncertainty. There is likely to be a sentiment discount in the prices of our commodities due to coronavirus outbreak.

In the medium term, the Group expects additional supply would be needed in most of its operational sectors. It expects an increase in demand in the Asia region which would be beneficial for its products.

In the long term, population growth and rising living standards are likely to drive demand for energy, metals, and fertilisers which would benefit the business of the Group.

Ongoing crude prices uncertainty with the Saudi-Russia crude price war increases after Russia not supporting the production cuts proposed last week by the Organisation of the Petroleum Exporting Countries (OPEC) to stabilise oil markets hit by worries over the global spread of the coronavirus. Now, Saudi Arabia plans to boost its crude output above 10 million barrels per day (bpd) in April.

Recent News

On 9^th March 2020, the company announced that Board of BHP determined to pay an interim dividend of 65 US cents per share for the half year ended 31 December 2019. The dividend will be paid on 24 March 2020.


(Source: Interim Reports, Company Website)

Operational Update - H1 FY2020

On 21st January 2020, BHP group announced its operational review for the first half of the financial year 2020 ending 31st December. Based on exchange rates of USD/CLP of 683 and AUD/USD of 0.70, the company’s production and unit cost guidance remained the same for FY2020. Driven by higher by-product credits, the company’s Escondida unit costs were below-set targets for H1 FY2019. The production for copper equivalent remained same for H1 FY2020. The company’s third phase drilling activities at Oak Dam for copper exploration in Southern Australia are progressing as planned and are expected to complete in June 2020.

Financial Highlights – H1 Financial Year 2020


(Source: Interim Reports, Company Website)

Revenue Surged on the back of Iron ore and Copper

In the first half of the financial year 2020, driven by an increase in the revenue from iron ore and copper, the group’s revenue surged to USD 22,294 million from USD 20,742 million in H1 FY2019. The company’s Profit from operations stood at USD 7,333 million in H1 FY2019 versus a Profit from operations of USD 8,314 million in the first half of the financial year 2020. The PBT (Profit before tax) stood at USD 7,790 million in the first half of the financial year 2020 versus a PBT (Profit before tax) of USD 6,800 million in the first half of the financial year 2019. The PAT (Profit after tax) from continuing operations stood at USD 5,190 million in H1 of the financial year 2020 versus a PAT (Profit after tax) from continuing operations of USD 4,442 million in H1 FY2019. The PAT (Profit after tax) from continuing and discontinued operations stood at USD 5,190 million in H1 of the financial year 2020 versus a PAT (Profit after tax) from continuing and discontinued operations of USD 4,149 million in H1 FY2019.

Whooping Earnings Per Share

The basic earnings per share (continuing and discontinued operations) stood at 96.3 cents in H1 FY2020 versus basic earnings per share (continuing and discontinued operations) of 71 cents in H1 FY2019. The diluted earnings per share (continuing and discontinued operations) stood at 96 cents in H1 FY2020 versus diluted earnings per share (continuing and discontinued operations) of 70.8 cents in H1 FY2019.

Key Performing Indicators

Revenue & Underlying EPS


(Source: Interim Presentation, Company Website)

The Group has witnessed consistent growth in its revenue and earnings per share.

Disciplined Capital Structure


(Source: Interim Presentation, Company Website)

The company has consistently reduced its debt levels and made disciplined investments which result in the creation of consistent returns to its shareholders.

ROCE


(Source: Interim Presentation, Company Website)

The company has provided a decent return to its investors with the continuous growth in its ROCE from around 5 per cent in FY2016 to around 18 per cent in the first half of the fiscal year 2020 on actual basis.

Segment Performance


(Source: Interim Presentation, Company Website)

The Group has delivered a decent performance in all its sectors in the first half of the fiscal year 2020. Iron ore, which constitutes 60 per cent of the Group’s EBITDA, delivers an EBITDA margin of 69 per cent and ROCE of 49 per cent. Copper, which constitutes 20 per cent of the Group’s EBITDA, delivers an EBITDA margin of 47 per cent and ROCE of 9 per cent. Metallurgical Coal, which constitutes 9 per cent of the Group’s EBITDA, delivers an EBITDA margin of 37 per cent and ROCE of 13 per cent. Petroleum, which constitutes 13 per cent of the Group’s EBITDA, delivers an EBITDA margin of 65 per cent and ROCE of 15 per cent.

Operational Highlights


(Source: Interim Presentation, Company Website)

The company delivered an excellent performance in terms of safety, production, unit costs, GHG emissions, exploration and major projects.

Financial Ratios

 

The reported EBITDA margin in H1 FY20 was 53.70 per cent against the industry median of 29.10%. The reported operating margin was 37.30 per cent for the H1 FY20. Net margin reported was 23.30 per cent for the first half of 2020, higher from the industry median of 6.9%. Return on equity for the current first half stood at 10.2 per cent. On the liquidity front, BHP Group Plc’s current ratio stood at 1.62x. On leverage front, the debt-equity ratio of the BHP Plc’s was 0.56x i.e. the company is less leveraged than the industry with debt-equity ratio of 0.63x.

Share Price Performance


Daily Chart as on 11^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 11, 2020, at the time of writing (before the market close, at 9:05 AM GMT), BHP Group Plc shares were trading at GBX 1,158.40, up by 2.50 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,078.50/GBX 1,096.40. Stock’s average traded volume for 5 days was 13,932,015.40; 30 days – 7,253,721.20 and 90 days – 5,187,098.13. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.48. The outstanding market capitalisation was around £68.23 billion, with a dividend yield of 9.82 per cent.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare BHP Group Plc with its peers, EV/EBITDA multiple has been used. The peers are Anglo American Plc (NTM EV/EBITDA was 4.01), Antofagasta Plc (NTM EV/EBITDA was 5.18), Kaz Minerals Plc (NTM EV/EBITDA was 4.32), Ferrexpo Plc (NTM EV/EBITDA was 3.02)  and Centamin Plc (NTM EV/EBITDA was 4.05). The Average of EV/EBITDA (NTM) of the company’s peers was 4.12x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare BHP Group Plc with its peers, P/E multiple has been used. The peers are Anglo American Plc (NTM P/E was 7.62), Antofagasta Plc (NTM P/E was 20.15), Kaz Minerals Plc (NTM P/E was 4.67), Ferrexpo Plc (NTM P/E was 3.94), Centamin Plc (NTM P/E was 12.28) and Kenmare Resources Plc (NTM P/E was 6.54). The average of P/E (NTM) of the company’s peers was 8.74x (approx.)

Valuation Metrics



(Source: LSE)

As on 28^th February 2020, the Price to Earnings ratio of the BHP Group Plc’s was around 4.70 which was lower as compared with the industry which shows that the company is underpriced than the respective industry. The company’s EV/EBITDA multiple is 2.1x which was lower as compared with the industry which shows that the company is underpriced than the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE. In 2020, the ROE is increasing as compared to its peers.

BHP V/S FTSE-100 Price Performance – 2 Years


(Source: Thomson Reuters)

In the last two years, BHP Plc share price has delivered negative 15.43 per cent return as compared to negative 16.16 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last 2 years.

Dividend Yield


(Source: Thomson Reuters)

BHP Group Plc has a dividend yield of 10.15 per cent which is slightly higher than the industry dividend yield of 8.05 per cent and sector dividend yield of 7.88 per cent. This needs to be considered in view of the recent correction in stock price.

BHP V/S Industry V/S Sector – 1 year
 

(Source: Thomson Reuters)

In the last one year, BHP Group Plc share price declined by 34.63 per cent which is lower than the industry decline of 53.95 per cent and higher than sector decline of 25.80 per cent.

BHP Total return- 5 years


(Source: Thomson Reuters)

In the last five years, BHP Group Plc has delivered a total return of 15.75 per cent while the FTSE All share index has delivered a total return of 11.64 per cent.

Growth Prospects and Risk Assessment

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 outbreak of Coronavirus and crude price war between the Saudi and Russia could impact the company’s performance.

Conclusion

The company has shown decent financial performance in the current financial year 2020 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 the second half of FY2020 period with strong positive momentum in terms of volume and cost.

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 closing price of GBX 1,129 (as on 10th March 2020) with lower-double digit upside potential based on 4.12x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 8.74x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.
* The “Buy” recommendation is also valid for the current price as covered in the report as on 11th March 2020.

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