BHP Group Limited

BHP Details

BHP Aims To Deliver ~20% ROCE by FY2022: BHP Group Limited (ASX: BHP) is one of the world’s leading producers of major commodities, including iron ore, metallurgical coal, and copper. The Company, at 2019 global metals, mining, and steel conference, stated that it plans to deliver Return on Capital Employed (ROCE) of ~20% by FY2022. It highlighted that since the beginning of 2016, BHP has strengthened its balance sheet through a US$16 billion reduction in net debt, reinvested US$20 billion in the business and returned more than US$25 billion to shareholders.It has emphasized increasing volumes, reducing costs, and providing the highest safety standards for its staff, which has lifted return on capital by around 50 per cent.

In another update, it was mentioned that BHP Group Limited and BHP Group Plc have been served with the legal proceedings filed in the Business and Property Courts of Liverpool, England. However, BHP has intentions to defend the claim.

H1FY19 Financial Performance: Its revenue from continued operations increased by 1% pcp to US$20,742 Mn. Its profit after taxation from continuing operations attributable to the members of the BHP group increased by 117% to US$4,064 Mn.
 

March Quarter 2019 Operational Performance (Source: Company Reports)

What To Expect:At the end of March 2019, BHP had five major projects under development in petroleum, copper, iron ore and potash, with a combined budget of US$11.1 billion over the life of the projects.Petroleum production guidance for FY19 remains unchanged at the upper end of the range between 113 and 118 MMboe. Copper production guidance for the FY19 remains unchanged at between 1,645 and 1,740 kt.

Iron Ore FY19 production guidance has been reduced to the range between 235 and 239 Mt, majorly due to 6 to 8 Mt impact from Tropical Cyclone Veronica. Metallurgical coal and Energy coal FY19 production guidance remain unchanged at between 43 - 46 Mt, and 28 - 29 Mt, respectively. Its capital and exploration expenditure for FY19 is expected to be less than US$8 Bn.

Stock Recommendation: Its EBITDA margin and net margin for H1FY19 stood at 49.3%, and 21.4% which are better than the industry median of 34.6%, and 13%, respectively implying decent fundamentals of the company. Its ROE for H1FY19 stands at 7.6% which is better than the industry median of 6.5%. Its current ratio for H1FY19 stands at 2.55x which is better than the industry median of 1.87x. Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $37.700 (down 1.721% on May 30, 2019).
 

Origin Energy Limited

ORG Details

Undervalued at the Current Juncture: Origin Energy Limited (ASX: ORG) has an engagement in the operation of energy businesses including exploration and production of natural gas; electricity generation; wholesale and retail sale of electricity and gas; and sale of liquefied natural gas. In its March’19 quarter report, ORG has highlighted that Australia Pacific LNG delivered its highest-ever quarterly revenue of $763.9 million (up 53% pcp). Electricity sales volumes increased by 7% as compared to the previous quarter, driven by higher retail demand over summer, which was partially offset by lower Business volumes, whereas the natural gas sales decreased by 10% on the prior quarter, reflecting seasonal demand and the ending of short-term wholesale contracts in Queensland.


Key Metrics (Source: Company Reports)

What To Expect:The FY19 guidance for energy markets is unchanged, with underlying EBITDA to remain in the range of $1.5 - $1.6 Bn for FY19. The second half of FY19 is expected to be lower than the same period for FY2018 as a result of price relief initiatives of $60 Mn, and the continued impacts of retail competition and lower customer usage.

Australia Pacific LNG’s production is expected to remain in the range of 665 to 685 PJs. Australia Pacific LNG is targeting an operating breakeven of US$23 to 26/boe and a distribution breakeven of US$39 to 42/boe.

Capital expenditure, excluding Australia Pacific LNG and acquisitions, remains unchanged and is expected to be $385 to $445 million. A fully franked final dividend of 10 cps is expected at the full year 2019 results.

Stock Recommendation:Its ROE is in-line to the industry median of 6.5%. Its ROCE for H1FY19 stands at 5.22%. On the valuation front, its EV/Sales and EV/EBITDA for TTM stands at 1.3x and 5.9x, lower than the industry median of 3.8x and 10.5x, indicating undervalued at the current juncture.

Hence, considering the aforesaid facts and current trading level, we recommend a “Buy” rating on the stock at the current market price of $7.340 per share (down 2.133% on May 30, 2019).
 

Comparative Price Chart (Source: Thomson Reuters)    
 

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