BHP Group Limited

BHP Details

Mixed Performance in Volume Growth Across Resources in Q3FY21: BHP Group Limited (ASX: BHP) is a producer of various commodities, including iron ore, metallurgical coal, copper, and nickel. BHP is engaged in the exploration, development and production of oil and gas. BHP has witnessed an increase of 7% QoQ in Petroleum volume to 25.2MMboe in Q3FY21 on the back of increased working interest from Shenzi oil & gas field. Similarly, BHP has witnessed a growth of 34% QoQ in Energy Coal to 4.8mt in Q3FY21 on the back of higher volumes from Cerrejon project. BHP has seen a decline in the volume of copper, iron ore and nickel by 9%, 4% and 15% QoQ respectively. Lower volume of copper is a result of decreased output at Escondida. Decline in iron ore volume is a result of lower volumes at WAIO due to weather impacts. Due to planned maintenance at Kwinana refinery, the decline in nickel volume were witnessed. 

1HFY21 Financial Highlights: BHP has registered an increase in revenue to US$25,639mn in 1HFY21 against US$22,294mn in 1HFY20. Despite an increase in revenue, BHP has registered a decline in profit to US$4,828mn in 1HFY21 against US$5,190mn in 1HFY20. BHP has registered a decline in cash to US$9,291mn as on 31 December 2020 against US$13,426mn as on 30 June 2020. The total liabilities were decreased to US$49,810mn as on 31 December 2020 against US$53,558mn as on 30 June 2020.

Profit & Revenue (Source: Company Reports)

Well Diversified Business: BHP is well diversified across various segments and deals with multiple countries. Iron ore contributes ~64%, Copper contributes ~19%, Petroleum contributes ~10% and Metallurgical coal contributes ~9% to the total EBITDA in FY20. China contributes the highest to ~62% in total revenues among all other regions.

Key Risks: The company deals in multiple currencies. Thus, any adverse movement in foreign exchange currency prices may lead to financial losses for the company. Moreover, the company is exposed to climate change risk and any adverse climatic conditions such as Earthquake, Floods etc., may lead to discontinuation of business for an indefinite period.

Outlook: The company has provided production guidance for FY21. BHP expects copper production to be in a range of 1,535kt – 1,660kt, indicating a stronger performance at Escondida. The production guidance for petroleum, nickel and iron ore remained unchanged at 95-102MMboe, 85-95kt and 245-255mt, respectively, for FY21. The company has lowered its production guidance for Metallurgical coal and Energy coal at 39-41Mt and 18-20Mt, respectively, for FY21, due to weather impacts. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of BHP gave a return of ~2.58% in the last one month and a return of ~0.39% in the last three months. The current market capitalisation of BHP stands at ~$148.82bn as of 19 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$33.73-~$51.82. On the technical analysis front, the stock has a support level of ~$47.27 and a resistance of ~$51.75. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering a decline in cash and cash equivalents as on 31 December 2020 and a decline in profits in 1HFY21. For this purpose, we have taken peers Rio Tinto Ltd (ASX: RIO), Mineral Resources Ltd (ASX: MIN), Western Areas Ltd (ASX: WSA). Considering an increase in revenue in 1HFY21, decline in total liabilities as on 31 December 2020, mixed performance in volume growth across segments in Q3FY21, well-diversified business, and valuation, we recommend a “Hold” rating on the stock at the current market price of $48.79, down by ~3.42% as on 19 May 2021.

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

Mineral Resources Limited

MIN Details

Prospects for Robust Growth Across Segments: Mineral Resources Limited (ASX: MIN) owns a portfolio of mining operations across lithium and iron ore in Australia. As per the conference update on 5 May 2021, MIN has plans to grow crushing contracts in the next five years with external mining companies. The company is likely to have its own supply chain infrastructure in the coming five years. The company is developing its iron ore sites such as Yilgarn Hub, Utah Point Hub, Ashburton Hub and South West Creek to boost production and revenues. The company is likely to witness a growth in the capacity of iron ore from 20mtpa to 90mtpa in the next five years. MIN is also expecting Kemerton lithium hydroxide plant to operate at full capacity by 2022 and convert all spodumene to lithium hydroxide in the next three years.

1HFY21 Financial Highlights: MIN has registered an increase in revenue to $1,530.5mn in 1HFY21 against $986.7mn in 1HFY20. Despite an increase in revenue, the company has posted a decline in its profit to $519.3mn in 1HFY21 against $884.0mn in 1HFY20 on the back of higher costs. The company has posted a decline in cash to $1,113.4mn as on 31 December 2020 against $1,521.8mn as on 30 June 2020.

Income Statement (Source: Company Reports)

Diversified Business Across Various Segments: The company is present in Iron Ore segment, Lithium and contract and operational services. Iron Ore contributes ~73% in total revenue in FY20. China contributes ~13.7% to the total revenues in FY20.

Key Risks: The company deals in multiple currencies. Thus, any adverse movement in foreign exchange currency prices may lead to financial losses for the company. Moreover, the company holds interest-bearing liabilities. Thus, any severe change in interest rate may lead to higher interest cost for the company.

Outlook: As per the company reports, MIN is likely to produce natural gas and LNG with lower emissions. The company expects to explore one well in the next six months and two wells each year to produce cleaner energy through the wells. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of MIN gave a return of ~2.60% in the last one month and a return of ~16.08% in the last three months. The current market capitalisation of MIN stands at ~$8.74bn as of 19 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$18.465-~$49.790. On the technical analysis front, the stock has a support level of ~$41.08 and a resistance of ~$49.63. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in revenue in 1HFY21 and an increase in net assets as on 31 December 2020. For this purpose, we have taken peers Western Areas Ltd (ASX: WSA), Mount Gibson Iron Ltd (ASX: MGX), Iluka Resources Ltd (ASX: ILU) to name a few. Considering modest outlook, well-diversified business, increasing revenue, associated risks with the business and valuation, we recommend a “Hold” rating on the stock at the current market price of $44.90, down by ~3.087% as on 19 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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