Stocks’ Details
 

BHP Group Limited

Strong Operational and Financial Position: BHP Group Limited (ASX: BHP) is engaged in the exploration, production, and processing of minerals and hydrocarbon. As on 13 May 2020, market capitalization of the company stood at $90.5 billion. During the quarter ended 31 March 2020, the company reported a strong financial position underpinned by low-cost operations. During the quarter, the company reported total petroleum production of 82 MMboe and an increase of 5% in copper production to 1,310 kt. In the same time span, BHP reported a healthy balance sheet with net debt of US$12.8 billion and cash of US$14.3 billion. The disciplined controls, coupled with financial strength, have enabled the company to operate effectively amidst the global pandemic. The Board has declared a dividend of USD 0.65 per share which was paid on 24 March 2020.


Quarterly Operational Highlights (Source: Company Reports)

Future Expectations and Guidance: The company has provided guidance for FY20, wherein it expects to produce 110 – 116 mmboe of petroleum and 242 – 253Mt of iron ore. The strong financial position combined with low-cost operations, is expected to generate solid cash flow through the cycle. Despite the fallout of the coronavirus, the company has adequate supplies to operate and maintain critical equipment.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of BHP is inclined towards its 52-week’s low level of $24.05, proffering a decent opportunity for accumulation. The major projects of the company in petroleum and iron ore are tracking to plan, and the operations of BHP continue to run well. During 1H20, EBITDA margin of the company stood at 50.6%, higher than the industry median of 36.6%. Considering the decent operational performance, revised guidance, and attractive trading levels, we have valued the stock using price to earnings multiple based illustrative relative valuation method and have arrived at a target price with an upside of low double-digit (in percentage terms). For the said purposes, we have considered Rio Tinto Ltd (ASX: RIO), Newcrest Mining Ltd (ASX: NCM), and GR Engineering Services Ltd (ASX: GNG) as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $31.01, up by 0.944% on 13 May 2020.

Amcor Plc

Strong Investment Grade Balance Sheet: Amcor Plc (ASX: AMC) is engaged in the development and production of rigid and flexible packaging for a variety of food, beverage, pharmaceutical, medical-device, home, and personal care. As on 13 May 2020, the market capitalization of the company stood at $21.87 billion. During the quarter ended 31 March 2020, the company reported an increase in net sales to $3,141 million and growth in gross profit to $652 million. Higher earnings and improved working capital performance resulted in an increase of $217 million in free cash flow to $367 million. The company also reported a strong investment grade balance sheet with a cash balance of $538 million. The decent financial performance enabled the Board to declare a quarterly cash dividend of 11.5 cents per share.


Quarterly Financial Highlights (Source: Company Reports)

Growth Opportunities: The company has upgraded its guidance for FY20 and expects adjusted constant currency EPS growth of approximately 11-12%. It also anticipates free cash flow (before dividends) of over $1 billion and corporate expenses before synergies of $160 - $170 million. The operations of the company have been recognized as essential by the government and have seen a strong demand for healthcare and most food and beverage end markets. Amcor's business is expected to remain defensive in the long term and is expected to demonstrate resilience and remains well positioned to generate value for all stakeholders.

Valuation Methodology:Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of AMC is moving towards its 52-weeks’ high level of $16.74. During the quarter ended March 2020, net margin of the company was 5.7%, higher than the industry median of 4.9%. Considering the current trading levels, decent financial performance, and positive long term outlook, we have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of low single-digit (in percentage terms). For the said purposes, we have considered Orora Ltd (ASX: ORA), Coca-Cola Amatil Ltd (ASX: CCL) etc., as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $14.39, up by 3.6% on 13 May 2020. 

Fortescue Metals Group Ltd

Record Iron Ore Shipments: Fortescue Metals Group Ltd (ASX: FMG) is engaged in the mining, processing, and transportation of iron ore for export. As on 13 May 2020, the market capitalization of the company stood at $36.09 billion. During the quarter ended 31 March 2020, robust demand for Fortescue products resulted in record shipment of iron ore of 42.3mt. FMG reported strong generation of free cash flow, which resulted in cash on hand of US$4.2 billion. In the same time span, the company maintained an industry leading cost position and reported a 2% reduction in C1 costs to US$13.27/WMT. The decent financial and operational performance enabled the Board to pay a fully franked interim dividend of US$0.76.


Quarterly Operational Performance (Source: Company Reports)

What to Expect: The company is expecting strong ongoing demand for its products in China and is anticipating a steady recovery in economic activity. FMG is generating sustained cash flows and is investing in growth to provide returns to shareholders. The company has revised its guidance for FY20 and expects capital expenditure in the range of US$2.0 - US$2.2 billion. It has also upgraded its guidance for FY20 shipments to 175 - 177 million tonnes. 

Valuation Methodology: Price to Cash Flow Multiple Based Valuation (Illustrative)

Price to Cash Flow Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of FMG gave a return of 32.28% in the past six months and a return of 5.49% in the past three months. The stock is trading close to its 52-week high of $12.870. During 1H20, gross margin of the company stood at 54.9%, higher than the industry median of 46.8%. In the same time span, net margin of the company was 37.8% as compared to the industry median of 15.3%. Considering the decent returns in the past six months, trading levels, strong financial position, and positive outlook, we have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a target price with an upside of higher single-digit (in percentage terms). For the said purposes, we have considered South32 Ltd (ASX: S32), Newcrest Mining Ltd (ASX: NCM) and AngloGold Ashanti Ltd (ASX: AGG), as peers. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $12.18, up by 3.925% on 13 May 2020. 

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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