3 Blue-chip stocks that edged lower than expectations in May – Should you buy?

BHP Billiton Limited

BHP Details

Major project developments are progressing well:BHP Billiton Limited (ASX: BHP) has recently highlighted that group’s efforts on cost reductions can support a 10% value uplift from its portfolio. The group’s major growth projects that are valued at up to US$25 billion are expected to offer potential average returns of over 16% at consensus prices. Further, BHP’s Petroleum exploration program is said to have an unrisked value of over US$20 billion. For 9MFY17, BHP reported a record production at Western Australia Iron Ore (WAIO) and five Queensland Coal mines supported by increased wash plant utilization, while truck utilization also improved at New South Wales Energy Coal. However, copper production guidance was reduced to between 1.33 and 1.36 Mt following 44 days of industrial action at Escondida, while metallurgical coal production guidance reduced to be between 39 and 41 Mt due to damage of third party rail infrastructure caused by Cyclone Debbie. Hence, the commissioning of the Escondida Water Supply project and the planned ramp-up of the Los Colorados Extension project are now expected in the September 2017 quarter. While full year production guidance was maintained for petroleum and energy coal, WAIO production guidance was narrowed to 268-272 Mt. At Queensland Coal, the high-return Caval Ridge Southern Circuit latent capacity project was approved and is expected to have full utilization of the 10 Mtpa wash-plant with ramp-up early in the 2019 financial year.
 

Operational performance (Source: Company reports)
 
The company is increasing onshore US development activity with the approval of two additional rigs in the Haynesville. Further, monetization of the portfolio for value is being pursued with the divestment of non-core onshore US acreage at southern Hawkville advancing. During March 2017, the company executed the contract with Pemex to acquire a 60% participating interest in, and operatorship of, the Trion discovery in Mexico. In technology, replication of the WAIO Integrated Remote Operations Centre in Brisbane for Australian coal operations was completed as it supports lower operating costs. Importantly, the company has approved an investment of US$2.2 billion (BHP Billiton share) for the development of the Mad Dog Phase-2 project in the deepwater Green Canyon area of the Gulf of Mexico. At the end of the March 2017 quarter, BHP Billiton had three major projects under development in Petroleum and Potash, with a combined budget of US$5.1 billion over the life of the projects. During the quarter, BHP Billiton successfully concluded its US$2.5 billion bond repurchase plan by targeting short dated US dollar bonds maturing before 2023 and this was funded by BHP Billiton’s strong cash position. Importantly, the early repayment of the bonds has extended BHP Billiton’s average debt maturity profile and enhanced BHP Billiton’s capital structure. On the other hand, BHP might be asked to pay an additional tax under Western Australia’s Government’s plan with regards to lease rental fee paid on every tonne of iron ore produced. The stock declined by 6.7% over the last six months owing to fluctuations in commodity prices with a marginal decrease of 0.63% in last one month (as at June 01, 2017). Given the long-term prospects, we maintain a “Buy” recommendation on this dividend yield stock at the current price of $ 24.07


BHP Daily Chart (Source: Thomson Reuters) 

CSL Limited

CSL Details

Haemophilia market continues to be competitive: Global biotechnology leader, CSL Limited (ASX: CSL) reported a sales growth of 18% year on year (yoy) at US$3.6 billion, while net profit after tax (NPAT) grew by 36% to US$806 million for half year 2016/2017. The company continued its strategic expansion of plasma collection facilities surpassing 160 centers in the US and Europe. During H1FY17, liquid intravenous immunoglobulin Privigen grew by 34% yoy, while specialty products posted 25% yoy growth. However, sales got a boost from some atypical market activity, including competitor supply constraints. The one-off market conditions arising from competitor supply constraints in the first half are expected to normalize in the second half with competitors back on track. Further, the haemophilia market continues to become more competitive as new products enter the market, but CSL seems to be well positioned with the recent launches of its differentiated innovative products Idelvion (rFIX) and Afstyla (rFVIII). Although, the turnaround of Seqirus continues to be on track and expected to report a loss in the current fiscal year while breakeven is expected in FY18.
 

Seqirus turnaround (Source: Company reports)
 
CSL had also completed a US private placement of US$550 million last year as part of the company’s overall capital management program. The weighted average interest rate of the new placement was 3.0% with an average life of 12.5 years. The group’s net profit after tax (NPAT) is expected to grow in the range of approximately 18 to 20% yoy for FY17 in constant currency. Over the past six months the stock has moved up by 37.3% as on June 01, 2017 with a slip of 1.11% in last one month. Currently trading at high levels, we believe that the stock is “Expensive” at the price of $ 132.00


CSL Daily Chart (Source: Thomson Reuters) 

South32 Ltd

S32 Details

Lowered FY17 guidance for Metallurgical Coal: South32 Limited (ASX: S32) had earlier announced that the production at Illawarra Metallurgical Coal in FY17 is expected to be at least 10.0% below prior guidance of 7.9Mt due to elevated gas concentrations at Appin Area. The company has informed the New South Wales Department of Planning and Environment (Resources Regulator) of the incident and a prohibition notice has been issued. Production at the Area 7 and Area 9 longwalls, which form part of the broader Illawarra Metallurgical Coal operation, has been suspended until the investigation into the incident is completed. For Q3FY17, the company reported a robust performance at aluminum smelters and achieved an alumina hydrate production rate of more than 4.6Mtpa at Worsley Alumina, while increasing ore production at South Africa Manganese to an annualized rate of 3.8Mwmt pa led by favorable market conditions. Further, it has delivered first ore from the higher grade La Esmeralda deposit at Cerro Matoso. Mining extraction at Cannington has been temporarily impacted by an underground fire that damaged the load-out and shaft haulage infrastructure, and extraction of the higher grade (silver/lead) stope 60L has been said to be delayed.
 

Production summary (Source: Company reports)
 
For FY17, S32 expects payable silver, lead and zinc production of 16.5Moz, 135kt and 70kt, respectively, at Cannington. The company’s net cash balance increased by US$645M to US$1.5B in Q3FY17 led by working capital wind down and US$108M (South32 share) in distributions from equity accounted investments. Although the spending is expected to increase in the June 2017 quarter as land is purchased in preparation for the Klipspruit Life Extension project, total expenditure is estimated at US$420M (previously US$450M) for FY17. During 9MFY17, the company invested US$13.0M in exploration (US$2.1M capitalized) including US$1.7M equity investments. Over the past twelve months, the stock has moved up by 73.8% as on June 01, 2017 while slipping about 4.8% in last one month. We give a “Hold” recommendation on the stock at the current price of $ 2.62
 

S32 Daily Chart (Source: Thomson Reuters)

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