Last week BHP Billiton Limited (BHP) reported its full year net profit for the 2016 financial year.
It has been a challenging year for resource companies in general, given the downturn that we have seen in commodity prices since the end of 2010, which at the time saw BHP reach a high of $45 per share. Today it is trading around the $20 mark, after falling to a low of $14 in January following the unfortunate Samarco dam incident in Brazil.
On the surface, BHP’s reported net profit before tax (NPAT) of minus US$6.385bn which did not look good, however this included a number of one off (non-cash) write-offs, including an impairment charge of US$4.9bn on its US oil and gas assets and a US$2.2bn write down on the Samarco project plus an additional US$1.2bn in provisions for BHP's potential share of future costs in relation to the Samarco dam incident. These write-offs and provisions were all well flagged leading into the result, so they didn’t come as a surprise to the market.
Removing these one off non-cash items from the result, BHP actually produced a solid 2016 full year result with underlying NPAT of US$1.215bn being above consensus analyst forecasts.
BHP is still the world’s largest miner and one of the lowest cost resource producers in the world, holding a large number of tier 1 assets around the globe. Even at these depressed commodity prices, BHP was still able to produce earnings before interest, tax, depreciation and amortisation margins of 40 per cent in financial year 2016.
BHP was also able to post productivity gains of US$437m during 2016, with the company on track to achieve its guided US$2.2bn cost savings target by the end of financial year 2017.
Commodity prices seemed to have found a bottom throughout the 2016 financial year and our resource analyst Adrian Prendergast sees good value emerging in BHP at current prices with a valuation of $25.98 on the stock. In our view, BHP’s resilient free cash flow and leverage to improving commodity markets makes it an ideal exposure to a broader sector recovery.
In his forecast commodity prices assumptions, Adrian is only assuming an iron ore price of US$45/tonne in 2017 and 2018 vs the current price of $60/tonne and an oil price of US$52/barrel in 2017 and US$65/barrel in 2018 vs the current oil price of $49/barrel. So as you can appreciate in terms of his valuation of $25.98 he also isn’t being overly aggressive in his commodity price assumptions.
So after being underweight resources for an extended period of time, we now believe that it is important that portfolios once again have exposure to resources and we believe that BHP is the best way of gaining this exposure.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410