ii view: BHP issues coronavirus warning

An estimated dividend yield of 5% is attractive, but what about the coronavirus?

Half-year results to 31 December 2019

• Revenue up 7.5% to $22.3 
• Adjusted profit (EBITDA) up 15% to $12.1 billion
• Underlying attributable profit up 39% to $5.2 billion
• Net debt up 21% to $12.8 billion under new (IFRS 16) accounting standards
• Interim dividend up 18% to 65 US cents per share

Guidance:

Production and cost estimates unchanged

Chief executive Mike Henry said:

"We delivered a strong set of half-year results, grounded in solid operational performance. Underlying EBITDA was up 15%, to US$12 billion, and return on capital employed increased, to 19%. With solid cash flow, the Board announced an interim dividend of 65 US cents per share, our second highest on record.

“Despite near term uncertainty - due to the coronavirus outbreak, trade policy and geopolitics - we remain convinced about the positive underlying fundamentals of our commodities. We see enormous potential to reliably deliver exceptional financial and operational performance, and to grow value and returns."

ii round-up:

Iron ore, copper and coal miner, BHP Group (LSE:BHP), reported broadly in-line results, but appeared to signal some caution in the outlook given a below forecast increase in the dividend payment. 

Buoyed by a 64% increase in iron ore profit following previous Brazilian supply disruption and ongoing Chinese demand, adjusted group profit (EBITDA) rose by 15% to $12.1 billion, matching analyst estimates. 

Profit on a similar basis for core group products copper and coal rose and fell by 22% and 56% respectively. 

But the increase in the dividend to 65 US cents proved below forecasts of around 70 US cents, potentially reflecting heightened management caution in the outlook given the continued fallout from the coronavirus and trade policy tensions. 

Management noted: “If the viral outbreak is not demonstrably well contained within the March quarter, we expect to revise our expectations for economic and commodity demand growth downwards.”

BHP shares fell by more than 2%, similar to rivals Anglo American (LSE:AAL) and Antofagasta (LSE:ANTO) and come in the wake of cautious coronavirus comments from iPhone maker Apple (NASDAQ:AAPL). 

Increased net debt reflected both last year’s final dividend payment and changes under new accounting standards. Group gearing rose from 15.4% at the end of June 2019 to 19.7%. 

Both production and cost estimates for the full year 2020 were left unchanged. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather, not to mention trying to second guess the price direction of the commodity being extracted, can all impact financial performance. 

For BHP, specifically, a focus on portfolio simplification, cash generation and capital discipline delivering higher cash returns to shareholders, look sensible.

For investors, a forecast two-year prospective dividend yield of around 5% (not guaranteed) generates attraction in the current low-interest rate environment. A forward price/earnings ratio (PE) marginally below the three-year average also highlights possible value. But the yet unknown full impact from the coronavirus, and still strained US China trade relations, offer some reason for caution. 

Positives

• Exposure to a diverse portfolio of commodities
• Focus on shareholder returns
• Attractive dividend payment

Negatives

• The coronavirus could further hinder Chinese and global economic growth
• China’s growth rate has hit a 29-year low – a key market for BHP
• Operates tailings dams that could cause severe damage and loss of life if they failed

The average rating of stock market analysts:

Hold