2 Blue-chips that we like despite a challenging environment – BHP, FMG

BHP Group Limited

Strong Operational Update: BHP Group Limited (ASX: BHP) is into extracting and processing minerals, oil & gas. It is a leading resource company with its products sold globally. Recently, the company has provided the operational review for the half year ended 31 December 2018 and updated about the appointment of the new company secretary. It kept the production guidance unchanged in FY19 for petroleum, iron ore, metallurgical coal, and energy coal. However, total copper production guidance increased to between 1,645 and 1,740 kt and due to the retention of Cerro Colorado. On 17 December 2018, a US$5.2 billion off-market buyback of BHP Group Limited shares were successfully completed.In the petroleum segment, a significant achievement is the first appraisal well in Mexico encountered oil.

Among the major developments, during the December 2018 quarter, the North West Shelf Greater Western Flank-B project achieved first production ahead of schedule and under budget.At the end of December 2018, BHP had five major projects under development in petroleum, copper, iron ore and potash, with a combined budget of US$10.6 billion over the life of the projects.


Financial KPI’s (Source: Company Reports)

In FY2018, higher prices and a robust operating performance generated strong cash flows, helping the company to reduce net debt and increase dividends. On the financial front, the company reported US$43,638 million net revenues in FY18 compared to restated numbers of $36,135 million in FY17, up by 20.8% Y-O-Y primarily driven by global materials demand from China. Thenet income after tax stood at US$10,064 million in FY18 compared to US$6,694 million in FY17, significantly up by 50.3% approximately, driven by higher operating and investment & interest income. The current ratio significantly increased by 35.6% and stood at 2.51x in FY 18 as compared to 1.85x in FY17, mainly on the improvement of current assets primarily from assets held for sale.

What to Expect from BHP Moving Forward: Going forward, the company has a two-year budget, a five-year plan and a longer-term life-of-asset plan, with a positive outlook in the short-term despite volatile commodity prices. Moreover, it focuses on a strategy of owning and operating large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market.

The stock of BHP, however, is currently trading at $32.630 on ASX, with a market capitalization of ~$96.54 billion. It is trading at a PE multiple of 34.80x and generated a YTD return of 1.48%.

The stock of BHP, however, is currently trading at $32.630 on ASX, with a market capitalization of ~$96.54 billion. It is trading at a PE multiple of 34.80x and generated a YTD return of 1.48%.

On the back of quarterly operational developments coupled with strong financial performance, we believe that the stock has potential given the fundamentals while China's challenging economy might impact the performance in the near term, thus, we maintain our “Hold” recommendation on the stock at a current market price of $32.630 (down 0.427% on 23 January 2019). 

Fortescue Metals Group Ltd

Decent Outlook:Fortescue Metals Group Ltd (ASX: FMG) is into discovery & development of major iron-ore deposits. It has constructed some significant mines in the world. The team focuses on to be the safest, low cost and profitable mining company.

FMG’s Key Metrics (Source: Company Reports)

On the financial front, the company reported US$6,887.0 million net revenues in FY18 compared to $8,447.0 million in FY17, down by 18.5% Y-O-Y. The operating margin stood at 23.0% in FY18 which is higher than the industry median of 19.8%. The EBITDA margin stood at 45.3% which is significantly higher than the industry median of 30.2%. The FY18 results were supported by cost leadership and continuous focus on productivity and efficiency initiatives.
 
What Could Support FMG Moving Forward: Going forward, the growth in Australia coupled with China’s Belt and Road initiative indicates a further investment in infrastructure which could lead to continued investment and demand for steel.This may prove advantageous for Fortescue and Australia’s mineral resources sector. Additionally, the company has a focus on maintaining the cost leadership position, through capitalizing on technology and other innovation initiatives.

The stock of Fortescue, however, is currently trading at $4.68 on ASX, with a market capitalization of ~$14.38 billion. It is trading at a PE multiple of 12.24x and generated a YTD return of 12.53%. The stock generated a positive return of 17.63% and 13.90% over the last three months and one-month period, respectively. By looking at its decent outlook along with affirmative stock performance over the last few months, we maintain our “Buy” recommendation on the stock at the current market price of $4.680.   
 

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