BHP Group Limited

BHP Details

BHP Launches Subordinated Note Repurchase Plan: BHP Group Limited (ASX: BHP) is engaged in the exploration, production, and processing of minerals including coal, iron ore, copper and manganese ore and hydrocarbon. As on 3 September 2020, the market capitalization of the company stood at ~$113.42 billion. The company has recently approved a global multi-currency subordinated note repurchase plan which is targeting US dollar and euro subordinated notes issued in 2015. This plan is likely to reduce the gross debt balance, associated interest costs and will enhance the capital structure of the company. The company also intends to redeem the 6.250% US$1 billion subordinated notes.

FY20 Results: During FY20, the company reported resilient results and well managed its portfolio for sustainable value creation. Despite COVID-19 headwinds, the company reported an underlying EBITDA of US$22.1 billion and an EBITDA margin of 53% in FY20. In the same time span, it generated a free cash flow of US$8.1 billion and distributed 55 US cents as dividend, reflecting a payout ratio of 72%.

FY20 Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks including the risks related to volatility in prices for various commodities, disruption in supply chains, high-cost production, a decline in demand, economic impacts followed by the outbreak of the COVID-19 pandemic, resource depletion, increased input costs, water constraints, a scarcity of high-quality future development opportunities, etc.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company is building on its strong foundations to prosper in uncertain times and is likely to create value in the longer term. It has a demonstrated track record of growth and seems to be well-positioned to deliver decent returns in the coming years. BHP will pay its final dividend on 22 September 2020. The company retains a modest long term outlook for its commodity demand owing to rising living standards which are expected to drive demand for energy, metals, and fertilizers. As per ASX, the stock of BHP gave a return of 15.44% in the past six months and a return of 3.11% in the past one month. The stock of BHP is also inclined towards its 52-weeks’ high level of $41.47. On a Technical Analysis front, the stock of BHP has a support level of ~$36.520 and a resistance level of ~$40.587. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of high single-digit (in percentage terms). Considering the current trading levels, decent returns in the past six months, resilient financial performance in the uncertain environment and modest long term outlook, we recommend a ‘Hold’ rating on the stock at the current market price of $37.610, down by 2.312% on 3 September 2020.

BHP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Jupiter Mines Limited

JMS Details

Tshipi Declares ZAR330 million H1 Dividend: Jupiter Mines Limited (ASX: JMS) is engaged in the operation of the Tshipi Manganese Mine in South Africa and the sale of manganese ore. As on 3 September 2020, the market capitalization of the company stood at ~$528.93 million. The company has recently announced that it will receive ZAR156 million as a part of dividend declared by the Board of Tshipi é Ntle Manganese Mining Proprietary Limited and ZAR25 million in marketing profits. Despite the COVID-19 crisis, Tshipi remained profitable and reported positive cash flow, demonstrating its low-cost operations throughout the cycle.

FY20 Financial Highlights: During FY20, the company continued to deliver returns to shareholders and maintained low-cost operations. During FY20, Tshipi operations reported total revenue of $628 million and EBITDA of $314 million. In the same time span, it reported an NPAT of $197 million. During the period of lockdown, manganese price strengthened because of a reduction in supply but has softened to sustainable levels after the commencement in mining.

FY20 Financial and Operational Highlights (Source: Company Reports)

Outlook: Throughout the pandemic and lockdown period, Tshipi has remained profitable and cash positive. It is focusing on the lowest cost manganese producers and is emphasizing on its base 3mtpa sales. The company is aiming to maximize its productivity and profits and is exploring strategic opportunities that crystallize value for Jupiter and Tshipi.

Key Risks: The company is exposed to a variety of risks including the risks related to fluctuations in the price of manganese ore; fluctuations in third party contractor costs, any reduction in the global demand for steel; risks arising from mining operations being concentrated at one mine; economic, political or social instability in South Africa, which may affect operations or profit.

Stock Recommendation: The company seems to be well-positioned to benefit from Tshipi’s large mining reserves. Despite the challenges experienced from the outbreak of COVID-19 crisis, the mining team achieved its targets and is capable of meeting all financial obligations in the event of uncertainty. As per ASX, the stock of JMS gave a return of 12.5% in the past six months and is inclined towards its 52-weeks’ low of $0.190. On a TTM basis, the stock of JMS is trading at a price to book value multiple of 1.2x, lower than the industry average (Basic Material) of 6x. On the technical analysis front, the stock of JMS has a support level of ~$0.265 and a resistance level of ~$0.310. Considering the current trading levels, returns in the past six months, positive long-term outlook, and decent performance of Tshipi, we recommend a ‘Hold’ rating on the stock at the current market price of $0.270 as on 3 September 2020.

JMS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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