Late yesterday the big Australian booked a profit of $US13.83 billion, up 23.2%. Underlying profit rose 10.1% missing consensus slightly. Revenue for the year was up 1.9% to $US67.21 billion as production growth slightly outweighed price falls. However, EBIT was own $US3.4bn. The US62c fully franked dividend was up 4% on last year.
London hated it, selling it down 5% overnight in a rising market. JP Morgan has a net pros and cons summary:
The negatives
- Investors potentially no longer need to own a large stake in BHP Ltd to gain a large stake in NewCo.
- BHP is now trading at relatively high multiples vs its peers. Now that capital management appears to be off the agenda near term, and there is unlikely to be a rush to own the Ltd stock to gain a stake in NewCo, the share price could remain under pressure near term.
- The implications around the lack of capital management suggest the balance sheet isn’t ready for it yet. Further, there was no outlook for capital management before the demerger occurs, likely a year away. Further, management did not clarify whether the US$25bn net debt target has been reduced.
- NewCo is likely to have “minimal” debt. This is a disappointment given if BHP were to place debt into the vehicle, capital management could be larger and / or sooner.
- The value of the Nickel West assets look marginal on the basis BHP didn’t include the assets in NewCo.
- With lower diversification, BHP’s premium rating vs peers could be impacted.
The positives
- Despite lower commodity prices during the period, and flat earnings FCF rose to US$9.4bn (US$6.1bn in 2H).
- The revised iron ore capacity outlook is a positive surprise (290Mtpa vs 270Mtpa previously).
- Cost and productivity performance has been relatively good.
- The progressive dividend has been maintained implying a higher payout ratio going forward.
- Demerger benefits: Greater focus on Tier 1 assets and potentially lower country risk.
There is a growing mood of optimism around RIO versus BHP which is, to my mind, completely wrong. When iron ore trades in the $70s next year Rio capital return will evaporate and that mood violently reverse. Mind you, my view that all iron ore miners remain the gun is unchanged.
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