BHP has endured a tough time after reporting both earnings and a company restructure this week, firstly let’s look at a quick summary of the news, there was plenty of it:
Earnings
- EBITDA came in as expected but NPAT was a -2.2% below analysts targets obviously some very impressive / huge numbers with revenue a colossal $60.82bn but probably overall a net miss.
- They beat with their dividend by ~4% putting the stock on an estimated yield of ~9% over the next 12-months.
Restructure
- BHP is undergoing a massive petroleum demerger which will eventually deliver a huge dividend windfall – this will take time!
- Once complete BHP’s oil and gas business would merge with Woodside, and WPL will issue new shares to be distributed to BHP shareholders.
- The business has approved a huge $5.7bn potash development plan in Canada heralding a new direction for the mining goliath.
- The company is also going to “unbundle” its dual listing and become one Australian corporate entity, I suspect most subscribers saw it this way anyway – I like this KISS move which should offer enhanced strategic flexibility benefits.
Clearly a lot of moving parts in the BHP investment thesis at the moment. Firstly, the second highest earnings ever makes for some impressive headlines as does US$10bn coming back to shareholders as dividends in September. Although an overall excellent result it’s important to consider where to moving forward against the backdrop of declining growth in China, it promotes the question – “is this the peak.” Secondly, the petroleum demerger option is a big step in BHP’s slimming down process – another ~$15-20bn of returns to shareholders potentially but a truncated earnings profile ex-petroleum. Hence, the third item, the looming potash investment seems an inevitable, albeit sensible, logical, strategic and hopefully fortuitously well timed outcome.
We like the direction that BHP is heading under the Chairman, Ken Mackenzie, and CEO Mike Henry. The continued portfolio streamlining, the clunky corporate structure unbundling and the pivot to future facing commodities (potash) looks sensible, strategic and logical to us. Slowing global growth will invariably be a headwind for the sector and by extension BHP but we believe there is now fresh news to keep a net positive focus on BHP. Plus importantly the stock will become less of a “sell” for fund managers moving to an ESG focused mandate.
Short-term BHP looks destined to slide back towards its June low, similar to our “best guess” for the S&P500 but we should also remember it’s going to pay a $2 fully franked dividend next month, the equivalent to ~5% at todays level. I wish MM were light on BHP across our portfolios as we would be looking to buy weakness but at this stage I would call it a bullish hold.
MM is looking for a test of Junes low for BHP i.e. over 10% lower
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