Tag: ASX:BHP

The rebound in Iron ore prices helped BHP post a first-half profit of AUD 4.2 billion. The resource giant announced its underlying profit for the six months to December 31st surged to USD 3.24 billion from USD 412 million during the same period a year ago.

The result was slightly better than the street’s forecast of USD 3.1 billion.

The company declared an interim dividend of 40 US cents per share, which is much better than the 16 US cents it paid a year ago. This takes into account the USD 155 million charge in relation to the Samarco dam failure in Brazil.

BHP’s bottom line has benefited from strong gains in commodity prices during H2 2016. Prices of Iron Ore more than doubled during 2016 on improved demand from China, while Crude Oil prices have recovered more than 40% from the multi-year lows hit in February last year.

The price correlation between BHP and Iron ore is very strong. Since posting a low of $14.10 in late January 2016, the share price has followed Iron Ore higher and almost doubled; reaching a high of $27.50 on January 25th.

We’ve been selling $27 calls over BHP for an additional $1.00 credit per share.

BHP FY17 revenue is expected to be $40b, EBIT of $12b and reported profit of $7.5b.

The earnings translate into EPS of $1.40 and DPS of $0.78 placing the stock on a 3.8% yield.

BHP’s recent production results were on the weak side, with lowered expectations in metallurgical coal, energy coal and copper.

The firm has cut its guidance for copper production by 2%, but has maintained their FY 2017 production guidance for other commodities. Copper and energy coal were the weakest spots, with those numbers missing analysis’ forecasts by 11% for both commodities.

Metallurgical coal output was 7% weaker than forecast, while Iron-ore and petroleum production was broadly inline with expectations.

Based on these numbers, BHP will need to deliver a significant uplift in production rates during the 2nd half of 2017 for copper and coal if the upper-end of their guidance is to be achieved.

We believe that BHP is up for the task. At current prices, shares are trading on +11% free cash flow and have a positive chart pattern over the last 12 months. Despite the weaker production result, we see scope for a move to $28.00 in the medium-term.

BHP will release its 2Q FY17 production report tomorrow. We anticipate the strength in iron ore, coal and copper will likely see production tracking in-line with FY17 guidance.

The forecast for FY17 revenue of US$40b and net profit of $6.8b should generate an EPS of $1.25, which will  place the stock on a 3.3% forward yield.

We remain long BHP with covered call options at or near $28 into April/May as our preferred strategy.

The 1QFY17 production result for BHP was weaker than the market had expected. Weather related issues were mainly the cause.

BHP maintained FY17 shipping guidance for Iron Ore at 265-275mt. Petroleum volumes are anticipated to improve in the year ahead following recent issues with weak production from the Gulf of Mexico assets and lower shale volumes.

Forecast FY17 revenue to be in the range of $35b, EBIT of $7b, DPS of $0.50, which places the stock on a forward yield of 3%.

Many analysts have a bearish outlook for commodity prices in Fy18 and as a consequence, lower forecast EPS and DPS for the majors. Our view differs slightly and we think any pullback early next year will most likely create a solid “buy on the dip” opportunity for both BHP and RIO.

Our algorithm engines will track these and other major resource names for potential entry conditions.

BHP.ASX

In summary, BHP posted a solid result with both NPAT and EBIT beating consensus. With the final dividend coming in at US14cps, FY16 total dividends of US30cps, the total dividends for the year are below expectations.  In FY17 we remain hopeful we’ve seen the bottom of the cycle for BHP earnings.

If you don’t review the graph of iron ore very often, you may appreciate the images below.

12 month close $56

20-year history.