BHP Billiton 

Growth initiative on Track: BHP Billiton Limited (ASX: BHP) posted a good set of numbers accompanied by record dividends. Underlying basic EPS came in 33% higher at 168 US cents per share and dividend per share was up 42% at 118 US cps. Major segments such as iron ore, Copper, Coal, and Petroleum made a significant contribution to the profits of the company. BHP has successfully cut on its debt in FY18 compared to the previous five years on the back of strong cash flows. Net operating cash flow for the year was recorded at US$18.5 Bn and free cash flow at US$15.Bn, close to the record cash flow generated in 2011. Given the high spot prices, BHP is estimating the free cash flow of around US$9 Bn in FY19. On the other hand, the group has entered into an agreement with Guyana Goldfields Inc. to acquire its 6.1% interest in SolGold Plc which would give the company access to high-quality copper exploration project in Ecuador, a highly prospective location for BHP. The Blue-chip miner is seeking to restock the resource base and grow the business. The exit process of the Onshore US is in line with the company’s plans and a couple of transactions might be due in the months to come. BHP is confident to complete the transaction by the end of the calendar year 2018.
 

Net Debt Structure (Source: Company Reports)
From the analysis front, the company has consistently achieved higher Net Margins over the past two year. For FY18, the net margin came in at 23.1% compared to the industry average of 11.7%. Over the period, the company has also generated a significant return for the shareholders with ROE at 15.9% against the industry average of 11.0%. Meanwhile, the stock has performed decently with one year return of 14.68% and it looks poised to move ahead. Going forward, BHP Billiton is on the right track to improve its cash flow which would help in reducing the debt and streamlining the business by selling non-core assets. The stock price has not discounted all the positive catalysts and has plenty of room ahead to move higher. We, therefore, recommend a “‘Hold” on the stock as the current market price of $31.310, while BHP has updated the market on resignation of company secretaries.
 

Rio Tinto

Decent Performance in 1H FY18:Rio Tinto Limited (ASX: RIO) posted good results for 1H FY18 with the increase of 2% in underlying EBITDA at US$9.2 Bn. Ordinary dividend per share also came in higher by 15% at 127 US cents per share compared to 110 US cents per share in the previous corresponding period. However, the company fell short on two significant metrics – Debt and Cash flow from operating activities. Debt during 1H FY18 increased by 36% to US$5.2 Bn whereas Net cash generated from the operating activities declined 17% to US$5.23 Bn compared to US$6.04 Bn in 1H FY17. In a recent development, one of the directors Chris Lynch stepped down from the position of Chief financial officer and was replaced by Jakob Stausholm. The company has also announced a US$1.0 Bn buyback program of Rio Tinto Plc’s ordinary shares. This adds to the on market buy-back programs of Rio Tinto plc shares of US$1.925 Bn announced last year. The company has been consistently adding value to the shareholders with ROE at 10.1% compared to the industry average of 7.0%. Net margin for 1H FY18 came in at 22.6% and was substantially higher compared to the industry average of 17.6%.
 

Underlying EBITDA H1 2017 Vs H1 2018 (Source: Company Reports)

Meanwhile, the stock is down 7.11% year to date but has recently rebounded from the support level of $68.39. We believe that unless the company succeeds in solving its rising debt issue and shrinking cash flow, investors would prefer to remain sideways. Moreover, any further increase in the debt in the second half would take the stock lower. Also, the positive factors have already been discounted in the price presenting a limited upside in the stock at the current juncture. We, therefore, give an “Expensive” recommendation on the stock at the current market price of $72.27 and believe that investors might get an opportunity to enter the stock at a lower price point.
 
 

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.