Morningstar | Raising BHP FVE to AUD 24.50 With the Lower Australian Dollar; Shares Still Overvalued
We raise our fair value estimate for no-moat-rated BHP to AUD 24.50 from AUD 23 per share previously. The increase primarily reflects the approximate 5% decline in the AUD/USD exchange rate to 0.738. Slightly higher near-term oil and coal prices are also a minor benefit. Our price assumptions for BHP’s other key commodities are largely unchanged. Fourth-quarter fiscal 2018 production was relatively strong, with iron ore, petroleum, and copper production all slightly better than expected. However, guidance for fiscal 2019 production is a bit weaker than we had forecast, except for iron ore.The strong finish to fiscal 2018 sees our earnings forecast increase to USD 1.90 per share from USD 1.79 per share previously. Slightly higher commodity price forecasts for fiscal 2019 outweigh the headwind from lower volumes. Our fiscal 2019 earnings forecast rises to USD 1.61 from USD 1.52 per share previously. Our earnings forecasts for fiscal 2020-22 are little changed and average USD 1.31 per year, mainly due to forecast price declines for copper, iron ore, and coal. BHP’s shares remain overvalued, with the market extrapolating current favourable prices and returns on invested capital far into the future. We think recent commodity price appreciation was supported by unsustainable fixed-asset investment growth and debt in China, and a temporary lull in investment in supply.
Rationalisation of the portfolio continues, with BHP agreeing to sell the small Cerro Colorado copper mine and the dormant Crinum Gregory coking coal mine for approximately USD 350 million. Final proceeds will depend on future copper prices and mine rehabilitation costs.
Plans to exit U.S. onshore petroleum assets continue to progress. BHP expects to finalise bids in the coming months and to complete the transactions by the end of 2018. BHP will also take an additional USD 440 million charge for the second half of fiscal 2018 relating to the Samarco disaster.
BHP's management is participating at the Management Behind the Moat conference held at Morningstar’s Chicago office on Nov. 7-8, 2018. If you are interested in attending the conference, please reach out to your sales representative for registration information.
BHP Billiton is a resources company. Co. extracts and processes minerals, oil and gas, primarily in Australia and the Americas. Co. operates four reportable segments: Petroleum, which is engaged in the exploration, development and production of oil and gas; Copper, which is engaged in the mining of copper, silver, lead, zinc, molybdenum, uranium and gold; Iron Ore, which is engaged in the mining of iron ore; and Coal, which is engaged in the mining of metallurgical coal and energy coal. Co.'s Petroleum unit comprises conventional and unconventional oil and gas assets, and includes exploration, development and production activities.
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