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BHP Billiton, "Forward earnings materially higher at current spot commodity prices", 5 November 2018, MN Ingham

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BHP-BILLITON-SPOT-PRICE-SURGES-FUNDAMENTAL-ANALYSIS

In trading strategies, it is important to factor in that future earnings could be materially higher than is being assumed by sell-side analysts due to the fact that spot commodity prices (notably iron-ore, coking coal, and oil price) are higher than forecast prices. I am keeping my DCF fair value at the more conservative level but in the meantime commodity pricing is likely to underpin the share price of BHP Billiton, particularly if spot prices go on for longer.   

Mining

BHP Billiton  

“Forward earnings materially higher at current spot commodity prices”          

Share price: AUD33.11 ASX, GBP16.13 LSE, ZAR300.96 JSE

Net shares in issue: 2.11 billion LSE and JSE

Net shares in issue: 3.21 billion ASX

BHP Billiton Limited and BHP Billiton PLC is a dual listed company; PLC has a secondary JSE listing 

Market cap: R634 billion JSE

Fair value DCF: $22,20, A$30.82 on ASX, £15.07 on LSE (including a 12% discount) and R282 per share on the JSE at an exchange rate of ZAR18.69/£

Note: fair value is based on forecast commodity prices and not spot prices (currently higher)

Trading Buy and Portfolio Buy

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 bhp-billiton

Further to my note dated 24 October (“US disposals on track”) things continue to look good for the commodity giant.

In trading strategies, it is important to factor in that future earnings could be materially higher than is being assumed by sell-side analysts due to the fact that spot commodity prices (notably iron-ore, coking coal, and oil price) are higher than forecast prices. I am keeping my DCF fair value at the more conservative level but in the meantime commodity pricing is likely to underpin the share price of BHP Billiton, particularly if spot prices go on for longer.   

Importantly, BHP’s sale of US shale assets has been completed with net proceeds of $10.4 billion. This is a good price and shareholders benefit from the proceeds.

The final assets are Eagle Ford, Permian, and Hayneville Onshore sold to BP for $10.5 billion gross. The sale of Fayetteville was for $0.3 billion on 28 September.

After tax and transaction costs the net cash is thus $10.4 billion.

These proceeds are returned to shareholders through an off-market buy-back of ASX listed shares and a special dividend. The mix is $5.2 billion buy-back and $5.2 billion special dividend.

The buy-back can be done for a discount of between 10% to 15% without material dilution. It will be done through a tender process.

The results of the buy-back will be announced on 17 December and BHP will then announce details of the special dividend.

I am assuming a buy-back price of A$29.00 on the ASX with 250 million shares bought back. The dividend will be approximately $1.00 per share (US dollar).

Taking in to account the ordinary dividend and the special dividend, the stock is thus at a 10% yield. The forward yield on the future F2019 normal dividend is 5%.

Iron-ore, coking coal, and oil prices are higher than my baseline forecast, and so EPS could surprise to the upside. At spot, I estimate that BHP F2019 earnings could be at least 20% higher at $11.5 billion (versus forecast of $9.3 billion) whereas F2020 earnings could be 60% higher at $13.5 billion (rather than $8.5 billion). 

The ASX and LSE prices are the most relevant for South African investors (with the rate of exchange the deciding factor in the rand price). I’d expect the ASX price to remain firm around the A$33 mark.  

BHP retains solid fundamentals and has good stock trader characteristics.     

Mark N Ingham  

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READ: How to read a fundamental analysis

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