Australia | Aug 24 2006
By Chris Shaw
It seems almost unfair an Australian record corporate profit can be met with disappointment, but such has been the reaction to BHP Billiton’s (BHP) profit result of US$10.15bn announced yesterday.
While the result was in line with the market’s forecasts in earnings terms, this was offset by some disappointment regarding the level of capital management initiatives the company has proposed. Merrill Lynch takes such a view, suggesting the result was strong operationally but didn’t include the earnings, dividend or capital management surprise that had been factored into the stock. JP Morgan agreed, suggesting the lack of a larger capital management move is likely to see the stock range trade in the shorter-term.
The major capital management initiative proposed by the company is a US$3bn share buyback, of which final details have yet to be announced in terms of whether it will be on or off-market and involving the Australian-listed or UK-listed shares, though consensus suggests an on-market buyback in the UK will be followed by an off-market buyback here.
JP Morgan suggests the prospect this process could be spread over as long as 18 months is also likely to disappoint some in the market, though Citigroup expects it to be completed quickly and for further initiatives to be announced early next year.
The capital management issue has taken the focus away from the operational side of the result, which met most expectations. JP Morgan suggests the company has done a good job in controlling its costs, Citigroup agreeing the cost side of the result was a positive surprise as the rate of cost increases appears to be slowing.
Following the result there have been minor cuts to earnings forecasts by most brokers, Merrill Lynch lowering its earnings estimates by 2-3% in FY07 and FY08 to US179.2c in FY07 and US140.7c in FY08, compared to Citigroup’s US220.8c and US194.8c. Thomson One Analytics shows median earnings per share estimates for the company stand at US218c and US211c.
All this is relative though, as the company’s earnings remain very much exposed to commodity prices. As an example, Citigroup notes there is as much as 20% upside to its profit forecasts if current spot prices for commodities are used rather than its price estimates, while Merrill Lynch sees as much as 20% upside in FY07 and 50% in FY08.
Merrill Lynch’s summary of the result was probably the most succinct, the broker suggesting the potential upside that supports its Buy rating comes from the fact the stock is currently trading on about 9.5x its earnings for FY07, which is simply too cheap for a diversified play with the potential for strong earnings growth and ongoing capital management initiatives.
The broader market agrees, as following the result the FN Arena database shows there has been no change to any broker ratings on the stock, leaving it at nine Buy recommendations and one Hold, this from Aspect Huntley. The average price target for the stock is $35.30, close to the median target according to Thomson One of $36.00.
BHP shares are weaker today, at 12.15pm the stock was down 55c at $27.84.