Company Overview: BHP Group Limited (ASX: BHP) is a global resource company mainly involved in the production of essential commodities, including iron ore, copper, nickel, metallurgical coal, potash, and petroleum. The company sells its products in different countries, including Singapore and Houston, United States. BHP is listed on the Australian Securities Exchange (ASX) as well as on London Stock Exchange (ASX: LSE). The company was listed on ASX on 13 August 1988.

BHP Details

Q1FY22 Results Highlights: During the quarter ending 30 September 2021 (Q1FY22), BHP delivered reliable operational performance and executed various planned major maintenance activities across its assets. Some of the key highlights of Q1FY22 are as follows:

• Production Update: During the quarter, BHP produced 27.5 MMboe of petroleum, up 3% on pcp, due to increased production from Ruby and higher seasonal gas demand at Bass Strait. Further, BHP reported iron ore production of 63.3Mt, down by 4% on pcp, due to planned major maintenance, including car dumper one and the impacts of temporary rail labour shortages due to COVID-19 related border restrictions.
• Approved Investment for Major Projects: During the quarter, BHP gave its approval for an investment of US$5.7 billion for the Jansen Stage 1 project in Canada and US$544 million for the Shenzi North development project in the US Gulf of Mexico.

Key Takeaways from FY21 Results:

• Rise in Revenue: For the year ended 30 June 2021 (FY21), BHP reported total revenue of US$60.8 billion, up 41.7% on the previous year, due to higher average realised prices for iron ore, copper, nickel, oil, natural gas, and thermal coal.
• Increase in Operating Cashflows: Over the year, the company’s operating cashflows grew by US$11.5 billion to US$27.2 billion, due to higher realised prices and decent operational performance across the Group’s portfolio.
• Decline in Net Debt: As at 30 June 2021, BHP had net debt of US$4.1 billion, down by US$7.9 billion as compared with the net debt position at 30 June 2020, due to the significant operating cash flow and the favourable commodity price environment.

5-year Financial Summary (Source: Analysis by Kalkine Group)

Key Metrics: Gross Margin for FY21 stood at 67.1%, up from 60.1% in FY20. EBITDA margin for FY21 stood at 61.9%, up from 51.3% in FY20. Current ratio for FY21 stood at 1.63x, up from 1.45x in FY20, demonstrating that the company has improved its ability to pay short-term obligations. ROE for FY21 stood at 22.8%, up from 16.7% in FY20.

Liquidity Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 15.49% of the total shareholding, while the top four constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.53%, and 3.08%, respectively, as also highlighted in the chart below: 

(Source: Analysis by Kalkine Group)

Decent Dividend History: For H2FY21, BHP has paid a final dividend of 200 US cents per share, taking the total FY21 dividend to 301 US cents per share, higher than the total dividend of 120.0 US cents per share in FY20. From 2017 to 2021, the company’s total dividend has grown at a CAGR of ~38%, demonstrating the company’s focus on rewarding its shareholders through dividends. At CMP of A$48.5, the company’s annual dividend yield stood at ~10.42%, higher than the 5-year average dividend yield of 5.49%.

Dividend History (Source: Analysis by Kalkine Group)

Change of Director’s Relevant Interests in Securities: On 23 November 2021, one of the company’s Director, Mike Henry, was awarded 107,183 Long Term Incentive Plan Awards and 49,304 Cash and Deferred Plan Awards (vesting after two years) and 49,304 Cash and Deferred Plan Awards (vesting after five years), as approved by shareholders at the BHP Group’s 2021 Annual General Meetings.

BHP and WPL to Create a Global Energy Company: On 22 November 2021, BHP announced that it has signed a binding share sale agreement with Woodside Petroleum Ltd (ASX: WPL) to merge BHP’s oil and gas portfolio with WPL, which will create a global top 10 independent energy company with high margin oil portfolio, long life LNG assets. Some of the key points of the merger are as follows:

• Under the merger, WPL will acquire the entire share capital of BHP Petroleum International Pty Ltd (BHP Petroleum) in exchange for new WPL shares. The completion is targeted for the second quarter of the 2022 calendar year.
• The merger of BHP’s petroleum business with WPL is expected to create synergies of more than US$400 million.

Approval for Scarborough Development: On 22 November 2021, BHP announced that it has given approval for US$1.5 billion capital expenditure for development of the Scarborough upstream project located in the North Carnarvon Basin, Western Australia.

Extended Tender Expiry Date for Noront Resources Ltd Acquisition: On 24 November 2021, BHP notified that one of its subsidiaries, BHP Lonsdale Investments Pty Ltd, is in discussion with Wyloo Metals Pty Ltd regarding its potential support of BHP’s C$0.75 per share offer to acquire Noront Resources Ltd. To gain more time for discussion, BHP has extended the expiry of its offer from 7:00 p.m. (Toronto Time) on November 30, 2021, to 7:00 p.m. (Toronto Time) on December 14, 2021.

Divestment of BMC interest: On 8 November 2021, BHP announced that it has signed a share sale and purchase agreement with Stanmore SMC Holdings Pty Ltd to divest 80% interest in BHP Mitsui Coal (BMC), which is an operated metallurgical coal joint venture in Queensland. Stanmore SMC Holdings Pty Ltd will pay US$1.1 billion cash on completion, and US$100 million in cash six months after completion. There is also potential for up to US$150 million in a price-linked earnout payable in the 2024 calendar year.

Key Risks:

• Commodity Price Risk: BHP is exposed to the risks related to the fluctuation in prices of iron ore, copper, nickel, metallurgical coal, and potash. The change in the prices of these commodities could impact the company’s financial performance.
• Foreign Currency Risk: The company’s operations are located different counties, which exposes it to the risks related to the fluctuations in the foreign currency exchange rates.

Outlook: Looking ahead, the company is focused on delivering long-term value by repositioning its portfolio towards future-facing commodities. Lately, BHP has made a series of targeted investments in copper and nickel exploration in Australia and Canada, which is expected to increase its exposure to future facing commodities. For FY22, the company expects its petroleum production to be between 99 – 106 MMboe, copper production to be between 1,590 – 1,760kt, iron ore production to be between 249 – 259 Mt, and metallurgical coal production to be between 39 – 44Mt.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of BHP has been corrected by 13.94% and is trading lower than the average 52-week price level band of A$35.56 -A$54.55. The stock has been valued using Price to Earnings multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers, considering the fluctuations in the prices of commodities like iron ore, copper, and nickel and labour shortages due to COVID-19 related border restrictions. For the valuation purpose, peers such as Rio Tinto Ltd (ASX: RIO), Mount Gibson Iron Ltd (ASX: MGX), Fortescue Metals Group Ltd (ASX: FMG), etc., have been considered. Considering the company’s decent FY21 performance, expected benefits from the proposed merger with WPL, modest outlook, repositioning of portfolio towards future-facing commodities, reduced net debt, current trading levels, and valuation, we give a ‘Buy’ rating on the stock at the current market price of A$38.45, as on 25 November 2021, 12:30 PM (GMT+10), Sydney, Eastern Australia).

BHP Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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