Best word to describe the FY result was disappointing with
i) NPAT $13.45bn vs $13.58bn consensus
ii) Net debt $25.8bn – appears not allocating any debt into new demerged company
iii) No capital management – although post analyst call CEO McKenzie commented BHP “is not prisoner to reporting cycle on announcing buy-back”, suggesting capital management is on the cards so long as it doesn’t impact credit ratings.
That being said there were multiple positive takeaways
i) Iron ore now guiding to 290mtn Pilbara capacity (previous 270mtns)
ii) Cost out $2.9bn vs $1.1bn guidance. Targeting further $3.5bn in productivity gains post demerger by FY17
iii) CAPEX ceiling of $14bn post demerger
iv) 12% fall in iron ore costs to US$25.89/tn (catching RIO at $20/tn). BHP “expect this to fall further”
v) 24% drop in coal cash cost (QLD coal costs now down 40% since peak)
Hidden capital management in that BHP are not rebasing its dividend despite demerger i.e. payout ratio will increase. Also fact no/minimal debt is being put into demerged vehicle should make NewCo a lot more attractive to new shareholders. Was quite clear on the call that there is still a lot to work through, given was only announced on Friday and still haven’t spoken to regulators about certain issues.
DLC structure to stay
Although a DLC structure is “not appropriate” for NewCo, it appears crystalising potential capital gains on remaining assets (i.e. Antamina, Spence, Cerro and NSW energy coal etc) in the BHP Plc entity and pre-emptive rights surrounding those assets means the DLC structure will not be collapsed. As mentioned in our Monday best ideas “If BHP decide that the DLC structure is worth holding onto, its likely funds that were expecting a DLC restructure would unwind DLC spreads, thus creating more demand for BHP Ltd shares i.e. there is currently A$300m of short interest in the Aussie line and US$775m in the ADR’s. In this scenario BHP would move to release more franking going forward, supporting the case for the Ltd premium back toward 8-9% for franking.”
BHP future as a simpler, more productive lower cost, large scale asset owner will deserve a PE premium but short term market will be disappointed with lack of capital management and detail around outlook for both New BHP and NewCo.
After 12% rally in the last 2 months and trading back at 3 year highs, we would be happy to take profits, with the view to own back at $35-36 level