BHP Group Limited

 A Quick Look on June 2019 Quarter: BHP Group Limited (ASX: BHP) is a blue-chip company with the market capitalisation of ~A$114.24 Bn as on 5^th August 2019. The company stated that for the year ended June 2019, it exceeded full-year production guidance for petroleum and met revised guidance for copper and iron ore.  The company further added that it witnessed a rise of 11% in copperequivalent production in June 2019 quarter, which reflects a strong operational performance throughout the portfolio, particularly at Western Australia Iron Ore and Queensland Coal which achieved annualised run rates above 290 Mt and 48 Mt, respectively during the quarter. Adding to that, it was stated that the underlying improvements in productivity were primarily offset by the impact of unplanned production outages of US$835 Mn during the first half. The following picture provides a broader overview of the company’s production:


Production (Source: Company Reports)

What to Expect: With respect to petroleum, the company is expecting a decline in the volumes to between 110 and 116 MMboe in the 2020 financial year on the back of planned maintenance at Atlantis and natural field decline throughout the portfolio. With respect to FY20, the company is expecting the production of Metallurgical coal in the range of 41Mt – 45Mt and Energy coal production to be between 24Mt- 26Mt. Additionally, for FY20, the company expects copper production in the range of 1,705Kt - 1,820Kt and nickel production to be around 87Kt.

Stock Recommendation: The company reported an EBITDA margin of 49.3% in 1H FY19 in comparison to the industry median of 34.6%. The net margin of the company stood at 21.4% in 1H FY19 against the industry median of 13.0%, which reflects that BHP is effectively converting its top-line into the bottom-line. The company delivered a return on equity of 7.6% as compared to the industry median of 6.5%. This implies that the company is providing feasible returns to shareholders in comparison to the broader industry. When it comes to liquidity, it posted a current ratio of 2.55x in 1H FY19 against the industry median of 1.89x. Currently, the stock is trending towards its 52-week high price of $42.33 with PE multiple of 26.54x. Hence, considering the above-stated facts and current trading levels, we maintain our “Hold” rating on the stock at the current market price of A$37.380 per share (down 3.61% on 5^th August 2019).
 

Fortescue Metals Group Ltd

Reduction of Net Debt: Fortescue Metals Group Ltd (ASX: FMG) is involved in the development, exploration, production, processing, and sale of iron ore. The market capitalisation of the company stood at ~A$23.52 Bn as on 5^th Aug 2019. Recently, the company, via a release dated 25^th July 2019 announced its June 2019 quarter results. The company reported quarterly shipments of 46.6mt, which included 4.7mt of West Pilbara Fines. The cash balance of the company stood at US$1.9 Bn as at 30^th June 2019 in comparison to US$1.1 Bn as at 31 March 2019. The company stated that the gross debt stood at US$4.0 billion as at 30^th June 2019, with net debt reducing to US$2.1 Bn. The company reported total capital expenditure for the June 2019 quarter of US$314 Mn, which includes sustaining capital, exploration and development expenditure.  The following picture provides an overview of key metrics of the company:


Key Metrics (Source: Company Reports)
Future Guidance:For FY20, the company is expecting shipments in the range of 170Mt-175Mt, which includes 17-20mt of West Pilbara Fines product. It anticipates C1 costs to be in the ambit of US$13.25-13.75/wmt, and average strip ratio of 1.5. The company is expecting depreciation and amortisation of US$7.70/wmt and total dividend pay-out ratio of between 50 and 80% of full-year net profit after tax. The company expects a total expenditure of US$2.4 Bn, which would be deployed in the following manner:

• Sustaining capital amounting to US$700 Mn
• US$200 Mn for operational development
• Queens Valley development US$150 Mn
• Exploration amounting to US$140 Mn.
• Major Projects like Eliwana (US$700 Mn) and Iron Bridge (US$500 Mn).

Stock Recommendation: The company reported a gross margin and EBITDA margin of 29.9% and 44.9% in 1H FY19 as compared to the industry median of 41.6% and 34.6%, respectively. The net margin of Fortescue Metals Group Ltd stood at 18.2% against the industry median of 13.0%, which represents that the company is effectively converting its top line into the bottom line in comparison to the peer group. The current ratio of FMG stood at 1.36x in 1H FY19 against the industry median of 1.89x.  With respect to the stock’s past performance, it produced returns of 13.85% and 45.36% in the time span of three months and six months, respectively. Hence, considering the above-stated facts and current trading levels, we maintain our “Hold” recommendation on the stock at the current market price of A$7.090 per share (down 7.199% on 5^th August 2019).

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