Investment Highlights
 

1. BHP Group delivered good results in H1 FY2020 period, with decent operational performance, stable earnings growth, and robust free cash flow generation.

2. With maximum value and returns, the net debt of US$12.8 billion stood at the lower end of the range; since 2016, ~US$31 billion reinvested; ~US$33 billion returned to shareholders.

3. The group has a strong foundation, with world-class assets across the best commodities, underpinned by the Capital Allocation Framework.

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

5. The company’s asset base is capable of generating strong cash flows, which will assist in accelerating the petroleum and copper production in the near term.
 

Business Overview: BHP Group PLC (LON: BHP)

BHP Group PLC (BHP) is a FTSE-100 listed, globally renowned resource company. The company is engaged in the operations of extraction and processing of minerals, oil and gas. It is operating with an employee base of around 72,000 (including contractors), predominantly in the Americas and Australia. The group has two parent companies, BHP Group Limited and BHP Group PLC as it operates under Dual Listing Structure. The company is also engaged in the production of multiple commodities, which includes uranium, metallurgical coal, iron ore and copper.

Key Statistics



A Glimpse of Business Segments & Divisions

The company’s operations are divided into four business segments, namely - Coal, Iron Ore, Copper and Petroleum.


(Source: Company’s Website, Annual Report 2019)
 

1. The Coal business is involved in the mining of thermal (energy) coal and metallurgical coal. The Group has produced 70 million tonnes of coal in FY2019.

2. The Iron Ore business is involved in the iron ore mining process. The Group has produced 238 million tonnes of iron ore in FY 2019.

3. The Copper business is involved in the mining of gold, uranium, molybdenum, copper, zinc, silver and lead. The Group has produced 1,689 kilotonnes of copper in FY 2019.

4. Petroleum comprises exploration, production and development activities pertinent to oil and gas operations. The group has produced 121 MMboe of Petroleum in FY 2019.

 

The company’s operating model is divided into three divisions - Petroleum, Minerals Americas and Minerals Australia.


(Source: Company’s Website, Annual Report 2019)
 

1. The Petroleum operating assets are in Macedon, Pyrenees, Angostura and Shenzi.

2. The Minerals Americas operating assets are in Escondida, Pampa Norte and Jansen.

3. 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.
 

Strategy for High Returns and Long-Term Value

BHP Group strategizes to aspire the best capabilities to possess, best assets in place, and making the best commodity available.

Since 2016, the BHP has taken several steps to achieve its target
 

Diverse and simplified portfolio of Tier 1 assets and maximizing shareholder value
 

1. Returned USD 27 billion in development.

2. Returned over USD 29 billion to shareholders.
 

Transformation
 

1. Developed structure to eliminate bureaucracy from functions.

2. Value chain automation.
 

Futuristic Approach
 

1. Expansion of exploration licenses.

2. Diversification in commodities and geographic operations.
 

 (Source: Company Presentation)

Significant Recent Actions Besides Several Steps Taken Regarding Coronavirus
 

1. 20^th March 2020: BHP intended to hire 1,500 additional people on temporary basis to support its workforce for operations across Australia.

2. 4^th December 2019: BHP announced the appointment of Gary Goldberg, as an independent Non-executive Director to the board, effected from 1^st February 2020.

3. 14^th November 2019: Mike Henry was appointed as Chief Executive Officer and Executive Director, which came into effect from 1^st January 2020.
 

Industry Outlook Reflecting Short-Term Uncertainties

The deepening and intensifying impact of Covid-19 coupled with Price-war initiated between Russia and Saudi Arabia, makes the short-term outlook quite uncertain. However, in the medium term, additional demand is expected from Asia (including China and India). Moreover, in the long run, population growth and rising living standards are persuading the future demand to rise for metals, fertilizers and energy. The sustainable future market would also require decarbonization of stationary power and the electrification of transport. 


(Source: Company Website)

Measuring Sustainable Growth Prospects Through Key Performing Indicators


(Source: Annual Report, Company Website)

Led by higher prices coupled with underlying improvements has yielded a robust cash flow, and subsequently enabled the company to slash net debt and increase their dividends.

Top Shareholders


(Source: Thomson Reuters)

Financial Highlights: Decent Growth Trajectory in H1 FY2020 (ended 31 December 2019)


(Source: Presentation, Company Website)

For 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 (last year) versus a Profit from operations of USD 8,314 million in the first half of the financial year 2020. 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 balance sheet stays robust, with net debt at US$12.8 billion at December 31, 2019. The underlying ROCE (return on capital employed) stood at 19% in H1 FY20.

Financial Ratios: Higher Profitability Margins with Stable Operating Performance


(Source: Thomson Reuters)

The reported EBITDA margin in H1 FY20 was 53.70 per centagainst the industry median of 29.60%. 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 stood at 0.56x, which reflects that the company is less leveraged than the industry, with a debt-equity ratio of 0.63x.

Share Price Performance


Daily Chart as on 8th April 2020, before the market close (Source: Thomson Reuters)

On April 8, 2020, at the time of writing (before the market close, at 10:25 AM GMT), BHP Group PLC shares were trading at GBX 1,276.20, down by 3.80 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,078.50/GBX 939.80.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. Also, the 14-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology

Method 1: EV/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 3.93), Antofagasta Plc (NTM EV/EBITDA was 6.31), Kaz Minerals Plc (NTM EV/EBITDA was 4.74), Ferrexpo Plc (NTM EV/EBITDA was 3.37) and Glencore Plc (NTM EV/EBITDA was 5.15). The Average of EV/EBITDA (NTM) of the company’s peers was 4.70x (approx.)

Method 2: Price to Cash Flow Approach (NTM)

 

To compare BHP Group Plc with its industry median, Price/Cash Flow multiple has been used. The industry median Price/Cash Flow (NTM) multiple was 5.90x (approx.).

Valuation Metrics


(Source: LSE)

As on 28th February 2020, the Price to Earnings ratio and Price to Cash Flow multiple of the BHP Group Plc was around 4.70 and 2.2, respectively, which was lower as compared to the industry. It reflects, shares are undervalued against its peers. The company’s EV/EBITDA multiple was 2.1x, which was lower against its peers.


 (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.

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

 
(Source: Thomson Reuters)

In the last two years, BHP Plc share price has delivered negative 3.73 per cent returns as compared to negative 22.24 per cent returns 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 8.63 per cent, which is slightly higher than the industry dividend yield of 7.41 per cent and the sector dividend yield of 7.31 per cent. This needs to be considered in view of the recent correction in the stock price.

BHP V/S Industry V/S Sector – 2 year

 
(Source: Thomson Reuters)

In the last two years, BHP Group Plc’s share price declined by 4.48 per cent, which depicts lower declining rate than the industry decline of 36.68 per cent and sector decline of 18.86 per cent.

BHP Total return- 2 years

 
(Source: Thomson Reuters)

In the last two years, BHP Group Plc has delivered a total return of 13.66 per cent while the FTSE All-share index has delivered a negative return of 13.94 per cent.

Growth Prospects and Risk Assessment

The company’s asset base can generate strong cash flows, which will boost the group’s petroleum and copper production rate in both the short and long term. With the expansion of new operations at Trinidad & Tobago and Southern Australia, the company has achieved higher business growth rate. The ongoing outbreak of Coronavirus and a crude price war between Saudi and Russia could impact the company’s performance in the near term. The company is cautious about the outlook for its key commodities in the short term but expects positive demand in the long-term.  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.

Business Outlook Scenario

The group has delivered strong results in the first half of FY 2020, with solid operational performance.With decent free cash flows reported, the management declared an interim dividend per share of 65 US cents. The group has many value-accretive projects in the pipeline, with lower risk and higher production capabilities. The company’s balance sheet is strong and has embedded a Capital Allocation Framework, which drives better investment decisions. From these strong foundations, the group will build on the momentum to deliver exceptional performance. BHP Group has entered the second half of FY2020 period on a positive note, with many strategic opportunities to be explored. In H1 FY20, underlying return on capital employed remained strong at 19 per cent.

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 1,265.31 (as on 8^th April 2020, before the market closed, GMT 10:25 AM), with lower-double digit upside potential based on 4.70x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 5.90x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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