BHP Group PLC (LON: BHP) – Record Interim dividend and strong growth in earnings per share during H1 FY21.

BHP Group PLC (LON: BHP) is a UK based resource Company, and it is engaged in the business of extraction and processing of minerals, oil, and gas. The Company is headquartered in Melbourne, Australia. Moreover, BHP is among the top producer of iron ore, metallurgical coal, and copper. BHP has four broader business segments – Petroleum, Minerals Australia, Minerals Americas, and Marketing. The Company is listed on FTSE100 index.

On 21 April 2021, BHP will release an operational review for the nine months ending 31 March 2021.

(Source: Company presentation)

Recent Trend of Dividend Payments

BHP Group has adopted a progressive dividend policy by delivering high cash returns over the last three years. The Company has a dividend policy of paying a minimum of 50% payout of underlying attributable profit for each period. The minimum interim dividend for H1 FY21 would be 60 cents per share. Moreover, the Board has also considered paying an additional dividend of 41 cents per share, taking the total interim dividend to 101 cents per share to be paid on 23 March 2021. The ex-dividend date was 04 March 2021.

(Source: Company Website)

Growth Prospects and Risk Assessment

BHP remained confident regarding its long-term prospects and expecting a solid long-term economic recovery and a boost in commodity demand. BHP has a diversified asset portfolio and global geographical presence, which had enabled the Company to sustain itself amid several operational headwinds caused by the Covid-19 pandemic. Overall, BHP has delivered consistent cash generation and regular dividend payments.

 (Source: Company presentation)

BHP is using technologies like cloud computing and smart analytics for better decision making. Also, the Company has plans for cost savings through technological advancement, and it has set up various technology centres.

BHP is exposed to various operational risks such as climate changes, cybersecurity, the risk associated with non-operated joint ventures, legal regulatory & compliance risk, liquidity risk. The volatility in the commodity prices and uncertainty in demand can affect the business of BHP Group. Any disruption in the operations and production caused due to macroeconomic or political events can affect the business.

Industry Outlook Dynamics

According to Grand View Research’s latest report, the market size of the global iron ore pellets industry was USD 47.63 billion during 2019. Moreover, the industry is expected to grow at a CAGR of 3.7% from 2020 to 2027. The expansion of steel production in emerging economies such as India, China and Vietnam would fuel market growth in the next few years. However, the Covid-19 pandemic had halted the manufacturing activities to a certain extent.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of BHP Group Plc.

A Glimpse of Business Segments (H1 FY21)

(Source: Company Website, chart created by Kalkine Group)

Financial and Operational Highlights (for the half-year ended 31 December 2020 (H1 FY21), as on 16 February 2021)

(Source: Company Website)

• In H1 FY21, the Company delivered a strong set of results, with record production at Western Australia Iron Ore.
• It saw a strong underlying operational performance, with record average concentrator throughput delivered at Escondida.
• Profit from operations increased by 17% YoY, underlying attributable profit surged by 16% YoY, with a stronger underlying EBITDA margin of 59%.
• The Company generated robust cash flows, with return on capital employed increased to 24%, net operating cash flow of USD 9.4 billion and free cash flow of USD 5.2 billion. This increment reflects strong operational performance and higher iron ore and copper prices.
• BHP has a strong balance sheet, with net debt of USD 11.8 billion (which is at the bottom of the target range).
• In December 2020 half-year period, the capital and exploration expenditure stood at USD 3.6 billion, including exploration of USD 281 million and maintenance expenditure of USD 1.1 billion.
• The Company is progressing well in the four major projects (which is under development), with the first production at the Spence Growth Option in December 2020.
• South Flank is well-positioned to deliver the first production by the mid-calendar year 2021.
• In the petroleum business, the Company has completed the acquisition of a further 28% interest in Shenzi.
• In the exploration business, it has an Option agreement for the Elliott Copper Project in Australia and a signed agreement for nickel exploration in Canada.
• In the last two years, the Company observed zero fatalities at the operating assets, with total recordable injury frequency (TRIF) reduced by 16% (against 2020).
• The gearing ratio at H1 FY21 year-end was 18.1%, which was lower than the previous period (30 June 2020: 18.8%).
• The Board has declared a record half-year dividend of USD 1.01 per share.
• Iron ore has a strong supply chain performance, with an increase in production.
• The Company has set a capital and exploration expenditure target of USD 7.3 billion for FY21, of which it plans to spend USD 450 million on the petroleum exploration programme.
• Further, BHP Group stated that it expects to produce copper in the range of 1,510 and 1,645 kt in FY21. The iron ore production is expected to be around 245-255 Mt in FY21. Metallurgical coal production is expected to be between 40 Mt and 44 Mt. The nickel production is expected to be in the range of 85kt to 95kt. The total petroleum production is expected to be in the range of 95 MMboe and 102 MMboe.
• In the medium-term, the Company expects to reduce the operational greenhouse gas emissions by at least 30% from 2020 levels by 2030, while it is establishing the trajectory to achieve the 2050 goal of net-zero operational emissions.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

On 10 March 2021, at the time of writing (before the market close, at 8:15 AM GMT), BHP Group PLC shares were trading at GBX 2,133.50, down by 3.02% against the previous day closing price. Stock 52-week High was GBX 2,408.50, and Low was GBX 939.80, respectively.

From a technical standpoint, 100-day SMA (GBX 1,943.9), 100-day EMA (GBX 2,013.8) and 14-day RSI (41.68) support an upside potential.

In the last one year, BHP Group PLC’s stock price has delivered a return of ~106.94% as compared to ~16.15% return of FTSE 100 index and a ~80.08% return of FTSE All-Share Mining Index, which shows that the stock has outperformed the benchmark index and the benchmark sector.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

BHP is well-positioned to tackle challenges presented by Covid-19 uncertainties, which may persist for the short term. Also, the global stimulus package would strengthen the recovery. Moreover, the Company estimated that the world’s economy would shrink by 4.5% during 2021. BHP remained optimistic regarding long term economic growth and commodities demand. The global crude steel production had demonstrated solid growth in China during 2020 with a significant drop in Rest of the World (“ROW”) production. Nevertheless, the average utilisation rates for crude steel in ROW had reached pre-pandemic levels. Furthermore, the Company had anticipated an attractive outlook for metallurgical coal for a medium to long-term period. The short-term outlook for copper demand seems to be encouraging, with copper prices remained robust in recent times.

The Company had anticipated capital and exploration expenditure to be around USD 7.3 billion during FY21 and USD 8.5 billion during FY22 due to the stronger Australian dollar. The petroleum production is anticipated to be ranging from 95 MMboe (million barrels of oil equivalent) to 102 MMboe during FY21. Moreover, the Copper production is estimated to be ranging from 1,510 kt to 1,645 kt during FY21, iron-ore production between 245 Mt and 255 Mt for FY21 and coal production to fall between 40 Mt and 44 Mt during FY21.

(Source: Company Presentation)

Considering the strong free cash flow and balance sheet position, decent shareholder returns, strong social value performance, record production at WAIO, sustainable dividend growth, strong underlying operations & decent growth in earnings per share, completed the transaction with Shenzi, sustainable cash returns, a good relationship with key shareholders, higher profitability metrics, lower leverage, and support from the valuation as done using the above method, we have given a “BUY” recommendation on BHP Group at the current price of GBX 2,133.50 (as on 10 March 2021, before the market close at 8:15 AM GMT), with lower-double digit upside potential based on 8.49x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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