BHP Billiton
Analysis of the 2018 Financial Statements
1. Objective of the Analysis
The objective of the financial analysis is to identify sound entities for long-term investment purposes.
For the purposes of this analysis I will have a look at the following:
- An overview of the operations
- Management
- Strategic drivers and key success factors
- Outlook
- Financial information
2. Background
BHP Billiton is in business for over 130 years employing some 62 000 people in more than 90 locations. BHP operates in both South and North America, Europe, Asia and Australia.
3. Management
The board of directors have an impressive array of qualifications and experience.
4. Strategic Drivers
The purpose of BHP is to “create long-term shareholder value through the discovery, acquisition, development and marketing of natural resources.”
The strategy of BHP is to “own and operate, long-life, low-cost, expandable upstream assets diversified by commodity, geography and market.
BHP focusses on cost effectiveness, technology, latent capacity, future options, exploration focussing on petroleum and copper, and the onshore US market.
At this stage their efforts are largely concentrated on Australia, the USA and the petroleum markets.
The capital allocation framework combines operating productivity and capital productivity in order to enhance cash flows.
5. Risks
5.1. Management
The risks management identified are as follow:
Risk of poor investment decisions
Loss of missed opportunities
Adverse market changes
Imposition of adverse compliance regulations
Commercial objectives not attained
Unforeseen liabilities arising from changes in the portfolio
Sales revenue and operational performance not meeting expectations
Anticipated synergies and cost savings not been achieved or delayed
Inability to retain key staff
Unforeseen catastrophes
Cyber-security risks
Samarco dam mishap and resulting litigation
Cost pressures and reduction in productivity
Reputable risks resulting van joint ventures
Safety and health risks
Commodity prices and demand
Proving reserves with the effect on capital projects
Volatility in the financial markets
5.2. Key Audit Matters
The external auditors identified the following matters:
Legal status and the accounting thereof relating to claims resulting from Samarco
The legal obligation of BHP to provide funding for the above
Disclosure of contingent liabilities associated with various claims
Calculation of tax liabilities in various tax regimes
Assets valuation
Closure and rehabilitation provisions
This is a large Group of Companies and one should expect that it faces a vast array of risks, however, this can offer opportunities to entrepreneurial managers.
6. Outlook
Standard and Poor’s grading is A for the Group with a “stable outlook”.
China is the biggest client of BHP and the growth outlook is somewhat reduced. However, many economies envy China for its remarkable growth rate in any event.
US tax rates were cut and the outlook is positive, even taking the US-China trade problems into account.
With a population aging and major debt burdens, Japan will most likely stagnate.
Brexit does put a damper on the growth outlook of Europe.
India expects to growth with a positive influence on the BHP Group.
7. Analysis of financial information
7.1 Segmental information
BHP segments its business into Petroleum, Copper, Iron ore and Coal. Iron ore contributes about 34% (2017 – 40%) of revenue with Copper at 30% (2019- 23%).
Iron ore recorded a margin of 49% (2017 – 49%) of revenue with Coal in the second place of 41% (2017 – 40%).
Iron ore leads with contributing 43% (2017 – 49%) to EBIT and Coal contributing 41% (2017 – 40%).
Noteworthy growth in revenues were as follow: Copper 59% (2017 – 1%) and Coal 17% (2017 – 68%).
The overall impression is positive: Sound margins with certain segments posting remarkable growth figures.
7.2 Liquidity ratios
The liquidity ratios are sound and reflects a conservative approach to working capital management.
7.3 Leverage ratios
The debt levels are modest and financial leverage is to the advantage of the Group.
7.4 Activity ratios
Working capital is well managed.
7.5 Profitability ratios
The Group does not report a “Cost of Sales” figure, but if the changes in inventories are taken with raw materials consumed in order to calculate a “Rule of the thumb” gross profit, then the GP % amounts to 90% (2017 – 91%). The net profit margin of 37% (2017 – 35%) is excellent.
The growth in sales amounted to 21% (2017 – 26%) while the expenses only increased with 14% (2017 – 2%) during the year under review.
7.6 Cash flow
The operating cash flow in relation to total liabilities amounts to 36% (2017 – 31%), noteworthy.
JSE Statistics
The EPS is 1595c, the P/E ratio is 18, the forward P/E is 15 and the dividend yield is 5%.
During the last 3 years the share price rose by 96%, while over the last 5 years it declined by 9%
The analysts have a consensus forecast to “Buy” while the 5-year graph in relation to the Top 40 supports this notion.
8. Conclusion
BHP Billiton has always achieved very sound margins making it a highly attractive investment.
The risks associated with the Group are high: Commodity price and demand fluctuations adds to the volatility, while catastrophes do add to the challenges management has to face.
However, with a conservative balance sheet reflecting low financial risks in terms of debt and with sound growth rates in revenue, while growth in costs is contained to a minimum growth, resulting in strong cash flows, makes this a sound investment.
The P/E ratio of 18 is high in the South African context, but not nearly as high as in the overseas markets where this Group is operating in.
I will rate BHP as a buy.
Anton Ferreira
31 January 2019