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BHP Shares Gain on Strong Profit and Record Dividend; Target Price GBX 2,560

BHP Group, one of the largest diversified natural resource companies in the world, delivered a strong profit in the first half of the 2021 financial year and declared record half-year dividend of $1.01 per share and ROCE up to 24%, helping its shares soar over 5% on Monday.

The Anglo-Australian multinational mining, metals and petroleum dual-listed public company said its profit from operations rose 17% to $9.8 billion, up. Attributable profit came in at $3.9 billion, which included an exceptional loss of $2.2 billion predominantly related to the impairments of New South Wales Energy Coal and associated deferred tax assets, and Cerrejón.

The world’s largest listed miner said its underlying attributable profit rose 16% to $6.0 billion.

The London-listed BHP‘s shares, which surged over 8% in 2020, had risen about 16% so far this year. The stock closed 5.22% higher at GBX 2,228 on Monday.

“Our analysis shows that the fair value estimate for BHP is between a bear case of GBX 1,200 per share and a bull case of GBX 2,950 per share, leading to our high fair value uncertainty rating,” said Mathew Hodge, director at Morningstar.

“The bulk of our BHP Billiton fair value estimate derives from just three commodities: iron ore, copper, and petroleum, in broadly equal contributions of approximately one third apiece. Coking coal is a minor contributor.  As commodity prices tend to move in unison, our valuation scenario uses high, low, and baseline prices. We don’t split individual commodities out.  Our price scenarios also factor in currency, operating, and capital cost adjustments.”

The dual-listed company forecasts to make an investment decision soon on its $5.3-$5.7 billion Jansen potash project in Canada and the Scarborough natural gas project off Western Australia, in which BHP will invest $1.4-1.9 billion, Reuters reported.

BHP Stock Price Forecast

Fourteen analysts who offered stock ratings for BHP in the last three months forecast the average price in 12 months of GBX 2,146.43 with a high forecast of GBX 2,560 and a low forecast of GBX 1,610.

The average price target represents a -3.66% decrease from the last price of GBX 2,228. From those 14 analysts, seven rated “Buy”, six rated “Hold”, one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of GBX1,950 with a high of GBX4,380 under a bull scenario and GBX680 under the worst-case scenario. The firm gave an “Overweight” rating on the natural resource company’s stock.

“We value BHP based on a simple average of our EV/EBITDA and P/NAV methodologies. This allows us to reflect both the shorter-term earnings power and longer-term value of the company. We apply an EV/EBITDA multiple of 6.7x, in line with its historical average. We apply a 1.0x multiple to our NPV estimate, which is based on a blended WACC of 9% and terminal growth rate of 2.0% from 2035,” said Alain Gabriel, equity analyst at Morgan Stanley.

Several other analysts have also upgraded the stock outlook. Citigroup raised the price target to GBX 2,100 from GBX 2,000. Berenberg initiated the coverage with hold rating and GBX 2,000 price target. Credit Suisse cuts to neutral from outperform; raises target price to GBX 2,100 from GBX 1,900.

In addition, UBS upped the target price to GBX 2,200 from GBX 2100. Independent Research increased the target price to GBX 2,100 from GBX 1,660 and rated hold. RBC cuts target price to GBX 2,500 from GBX 2,600. Liberum cuts price target to GBX 1,880 from GBX 2,400.

Analyst Comments

BHP declared a solid dividend of USc101/sh, exceeding our and cons. estimates of USc84-85/sh. Underlying EBITDA was in-line with cons. and within 1% of MSe but EPS missed by 2-5% on higher depreciation. Net Debt was broadly in-line and opex guidance was unchanged but is still based on favourable FX,” Morgan Stanley’s Gabriel added.

BHP‘s portfolio mix and quality stand out among peers. The low-cost position of its assets enables the company to generate FCF yield even in a stress scenario. It maintains a strong B/S, giving flexibility to pursue growth and/or increase cash shareholder returns, in particular given the company’s net debt target of US$12-17bn (post IFRS16 adjustment) vs FY20 levels of US$12.5bn. Spot FCF yields are comparable to peers, even without contributions from the Petroleum division, thus implying long-term optionality to a potential oil price recovery. We prefer BHP on a relative basis, given its attractive commodity mix ex-Iron Ore and free optionality on a potential oil price recovery.”

Upside and Downside Risks

Risks to Upside: Growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam) successfully executed. Better operating performance, lower costs and capital expenditure. Higher commodity prices – highlighted by Morgan Stanley.

Risks to Downside: Execution issues at growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam). Weak operating performance, higher costs and capital expenditure. Lower commodity prices.

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