Debt Surprise

Ord Minnett Research Insight: BHP Group (BHP)

BHP Group released its second-quarter FY21 production report. The results were broadly in line with Ord Minnett’s estimates for iron ore, which saw a 281Mtpa shipment rate, with copper ahead, while coal and petroleum missed our numbers. We make the following observations:

• BHP flagged net debt at the bottom end of the US$12–17bn guidance range versus Bloomberg consensus of US$8.7bn and our forecast of US$8.3bn prior to reporting. The difference related to working capital buildup, higher operating expenses, lower achieved prices and a number of one-off charges.
• FY21 production guidance remained unchanged at 276–286Mt for the Western Australia Iron Ore division, Escondida guidance has been narrowed, with the bottom end higher, and the other divisions remain essentially unchanged. Costs in coal, however, are above guidance in the first half due to weather and low production rates.
• BHP’s achieved iron ore price of US$103.8/t in the December half was in line with our US$104.5/t forecast. Hard coking coal at US$106/t, however, was well below our US$128/t estimate.

We were disappointed by the higher-than-expected net debt outcome, although some of the working capital buildup should unwind next period. Overall, we believe the stock continues to screen cheap, offering good returns. We are also attracted to the macro-economic backdrop that could see synchronised global growth through the second half of CY21 as economies recover from the COVID-19-related slowdown, supporting commodity demand.

We have lowered our FY21 EPS forecast by 8% after factoring in a number of charges listed by the company. We maintain a 70% dividend payout ratio for the first half, although our DPS estimate has fallen to US83c from US98c as a result of our earnings downgrade.

Despite the softer first-half cash flow outcome, we remain attracted to BHP’s valuation metrics at current share price levels. We maintain our Buy recommendation, while we have trimmed our target price to $52.00 from $53.00.