Brokers Remain Divided On BHP Value

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Chris Shaw

Australian resource stocks are in the midst of reporting June quarter production results and the biggest of them all, BHP Billiton ((BHP)) yesterday didn’t disappoint as its report came in broadly in line with market expectations.

As Citi notes the group’s iron ore operations were a bit weaker but this had been previously flagged and was offset by better results from the petroleum operations plus stronger than expected provisional pricing in the copper division. The overall impact in terms of earnings was minimal as the broker retains its net profit forecast for FY09 of US$10 billion.

This is slightly above market consensus of US$9.9 billion but below the US$10.5 billion forecast of Macquarie, who liked the fact the June quarter showed the company delivering on previously promised volume improvements. While it hasn’t yet updated its numbers Macquarie doesn’t expect big enough changes to its forecasts to cause it to shift from its current profit estimate.

Similarly Bank of America Merrill Lynch expects the company will manage to beat the consensus number for full year earnings and has made minor upward revisions to its estimates to reflect this view. The broker’s earnings per share forecasts now stand at US177.1c this year, US146.7c in FY10 and US145.7c in FY11, which compares to Citi at US180.4c, US161.5c and US220.3c respectively.

Macquarie is forecasting US180.5c, US135.6c and US219.7c for FY09-FY11, while the FNArena database shows consensus forecasts of US169.2c in FY09 and US150.5c in FY10. The most bearish looking forward is JP Morgan with its EPS forecasts of US112.1c in FY10 and US145.7c in FY11.

JP Morgan’s earnings forecasts see it retain its Neutral rating with by far the lowest price target in the market according to the database at $23.07 – this compares to an average target price of $36.33. Why no Sell rating? The broker points out the market views BHP as the premier stock in the mining sector and so applies a premium to the share price, a trend it expects will continue for some time given the lack of quality alternatives.

Others argue the stock is actually pretty good value in relative terms, Citi pointing out the group’s strong expected production growth in coming years leaves BHP well placed to deliver returns to shareholders well into the future. On the broker’s numbers, BHP should lift iron ore volumes by 50% by FY13, petroleum volumes by 47%, coking coal volumes by 40% and thermal coal volumes by around 20%. This should give BHP a relative value edge over Rio Tinto ((RIO)). This is especially the case when the latter’s balance sheet issues are also taken into consideration.

Macquarie tends to agree, its analysis suggesting the market is somewhat underestimating the latent capacity embedded in the company’s balance sheet as if BHP’s gearing was brought up to a similar level as that of Rio Tinto’s there is little between the two. While Macquarie rates both stocks as Outperform its preference is for BHP given it is the larger and more diversified option.

Less bullish is RBS Australia as while it sees BHP as well placed to benefit from any uptick in global resources demand, RBS sees no obvious catalysts at present to drive a further re-rating in the share price. Bank of America Merrill Lynch offered the same argument in its review of the production result, suggesting at current prices there was better value available elsewhere in the diversified resources space. Both brokers rate BHP as Hold, while Bank of America Merrill Lynch retains its Buy rating on Rio Tinto.

Post the BHP quarterly report, the FNArena database shows a total of three Buys and six Hold recommendations, while the average price target of $36.33 is up from $35.52 prior to the quarterly given the revisions to broker earnings forecasts. For comparative purposes, Rio Tinto is rated as Buy seven times and Neutral once.

Shares in BHP today are slightly weaker in line with the overall market and as at 11.20am the stock was down 37c at $36.53, which compares to a trading range over the past year of $20.00 to $42.07.

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