BHP's closing price in New York last Friday was down by 2.58% to US74.38 for two shares, or the equivalent of $50.27 in Australian money for one local share. That's down by $1.60 a share against the local market's closing price of $51.87.
Of course, we've been there before and markets only have two ways to go: up or down - although I prefer up! It was perhaps too early to see what CommSec's forecast for the day's trading would be; still I looked and saw that Goldman Sachs had updated their target price from $53.80 to $57.60! WOW! And here are the forecast earnings they've based their target price on, which they follow up with the following explanations:
BHP (Buy, A$57.60/sh TP, 23% TSR)
We increase our FY22-FY23 EPS by 48%/35% on higher iron ore and coal prices, and a weaker AUD. Our NAV is down 1% to A$48.4/sh, and we raise our 12m TP by 7% to A$57.6/sh (from A$53.8/sh). Our TP is based on 50:50 NAV:EV/EBITDA - next 12 months at a target multiple of 5x (down from 6x).
June Q and what to look for: FY22 guidance will be the focus in our view - GSe +4% YoY CuEq with particular focus on Fe shipments (GSe 286Mt) and copper (GSe 1.7Mt - 100% basis). June H realised pricing - Fe could be higher on better lump premium, but Jimblebar discounts may partly offset, expect coal discounts on pricing lags.
We retain our Buy rating on BHP on:
1) Strong earnings growth, FCF and dividend yield: We forecast a c. 40% increase in EBITDA (60-70% margins) and 55% increase in FCF in FY22 (equating to c. 15% FCF yield), driven by our positive view on iron ore, met coal, copper and oil prices. We forecast a dividend yield of 11-12% in FY22 & FY23.
2) Undervalued vs. historical multiple at peak earnings: On an EV/EBITDA basis, 1-2yr multiples for BHP look strong at 3.5x, below the 4-5x level in 2011 when earnings last peaked, yet BHP's balance sheet and FCF look much stronger now.
3) Strong production growth: BHP's group Cu Eq production should increase by 4% in FY22 and 6-7% in FY23, driven by a +250-270kt lift in copper volumes from Spence and Escondida, +10MMboe of oil volumes with new production from Mad Dog II/Atlantis Phase 3/Shenzi. BHP will likely also see a significant margin and FCF kicker in the Pilbara from the high grade South Flank deposit. Longer term, we have a positive view on BHP's organic growth options, particularly in oil where we see possible 50% volume growth to +150MMboe driven by Trion, Calypso (formerly T&T North), Shenzi North (formerly Wildling), and Scarborough.
4) Potential benefits from ongoing portfolio optimisation: Ongoing with the announcement to divest thermal and weak coking coal, and Bass Strait gas.
And they end it by saying, "We view the upcoming August results season as a positive catalyst for the sector, particularly for the major diversified miners based on strong capital returns."
On the strength of this, I think I ignore today's expected drop as a mere blip, and wait for the music to continue after the August results are in.
P.S. Since I posted this blog, Callum Newman, editor of "The Daily Reckoning Australia", wrote this opinion piece on the 19th of July: "Could iron ore hit US$300? One man says so ... Imagine, for a moment, iron ore at US$300 a tonne. Does that price level sound preposterous? I’m assuming you’re thinking yes at this point. But one analyst predicted this very level last week in the next 12–24 months. Oddly, the prediction appeared in the American media and not in the Aussie press. Considering it’s our top export and makes up a giant chunk of earnings on the stock market, one would think it’s newsworthy. Unfortunately, I can’t tell you the exact rationale for this forecast because I wasn’t at the conference where it was made. However, we can infer the basics from what’s happening around the world. The steel market is booming. But the big iron ore miners can barely hit their existing export targets. We know Brazil has been problematic for some time. But last week we saw Rio Tinto come out with its latest production results too. It was underwhelming. Rio’s exports in the last half were the lowest they’ve been since 2015. They are also struggling to hit their previous guidance for new projects due to various issues. It’s just another factor that keeps the market less supplied than it might otherwise have been. Don’t forget that Rio is Australia’s biggest exporter. Here’s something of note. The dud update didn’t hit the Rio price after it came out. That tells us that the market didn’t have an expectation of Rio delivering much growth anyway. But the Rio price is a way to measure the market’s changing expectation around iron ore from here. Rio, BHP, and FMG sold down earlier in the year on the expectation that the iron ore price would drop in the second half. That’s what all the investment banks were saying. They were, at least so far, way off base. I didn’t see any of them call it above US$200 in the first place, either."
