BHP Quarterly A Mixed Bag

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By Chris Shaw

BHP Billiton’s ((BHP)) quarterly production report was something of a mixed bag, but generally delivered on the market’s expectations, though how these numbers were made up was a little different than forecast as what some viewed as weaker petroleum, copper and uranium numbers was offset by stronger results from the iron ore division.

On Credit Suisse’s numbers, there is as much as 5% upside to earnings before interest and tax (EBIT) in the upcoming interim result thanks to the fact of total iron ore sales of 56.7 million tonnes in the half year, 46% of this was done at non-benchmark prices. In dollar terms this means as much as US$700 million in additional EBIT, a boost CS suggests Rio Tinto ((RIO)) is unlikely to share given more of its iron ore sales have been around benchmark prices.

This is more likely to be a short-term boost for BHP in Credit Suisse’s view, as the stockbroker notes the latest guidance for the ramping up of production at RPG4 suggests the process is taking longer than expected, with full capacity of 155 million tonnes annually now likely to come six months later than it had been forecasting. This is in contrast to Deutsche Bank, which actually sees the ramp up coming through quicker than it had been anticipating.

Elsewhere in the production numbers, copper output was lower than in the previous corresponding period and lower than both Credit Suisse and Daiwa Capital Markets had expected, primarily due to repair work at Olympic Dam causing its output to fall short. Earningswise this is offset by a positive provisional pricing adjustment in the copper division of US$467 million.

Looking at the other divisions, Bank of America Merrill Lynch saw coal production as OK and it notes while oil production for the first half was a record, the numbers in quarter on quarter terms eased sightly in the three months to the end of December.

Post the production report, changes to earnings forecasts across the market have been relatively modest, BA-Merrill Lynch lifting its FY10 earnings per share (EPS) forecast by 1.5% and its FY11 estimate by 2.6% to US198.5c and US308.8c respectively, though BA-ML notes this also factors in a change in analyst coverage for the company.

With respect to other forecasts, Credit Suisse anticipates EPS of US186.4c this year and US272.4c in FY11, while Daiwa Capital Markets (not incorporated into FNArena’s consensus data) has lifted its estimates slightly to US214.3c and US297.6c respectively. Morgan Stanley (idem as Daiwa) expects US220c this year and US297c in FY11, while the 1-2% increases to Citi’s numbers has it forecasting EPS of US207.4c and 283.2c respectively.

On the basis of today’s updated consensus forecasts (see Stock Analysis on the FNArena website), BHP shares are currently trading on Price/Earnings multiples of 16.9 and 11.7 for FY10 and FY11 respectively. However, these numbers can change significantly when we take into account that the Australian dollar trades at around US91c. If we use the present value for the AUD, then PERs jump to 19.1 and 13.3 respectively.

Another point of note from the quarterly production report was in the outlook statement. RBS Australia notes this was little changed from previous quarters as management has indicated the strength of demand for steelmaking products is leading BHP to change the terms of iron ore, coking coal and manganese prices.

Evidence of this comes in the switch to an increasing proportion of iron ore sales in the spot market, while sales terms in both coking coal and manganese are being shortened. While this process may be difficult to negotiate, RBS Australia expects the end result in a tight market will be a benefit to BHP’s revenues.

Morgan Stanley notes prior to the quarterly production report market consensus for interim earnings stood at around US$4.8 billion, which was below its own forecast of US$5.4 billion. The changes to estimates on the back of the quarterly mean this gap is now closing somewhat, as Citi for example has lifted its interim profit forecast to US$5.5 billion.

Risk remains to the upside in Citi’s view given strong spot iron ore and thermal coal prices in particular, so it retains its Buy rating on the stock. There appear no changes in ratings post the quarterly as the FNArena database continues to show the stock rated as Buy five times and Hold four times.

What makes the stock preferred to Rio Tinto ((RIO)), according to Credit Suisse, is BHP shares represent better relative value at current price levels. CS also prefers the fact BHP’s growth projects are well funded by its strong balance sheet and there is potential for capital management initiatives going forward. Deutsche Bank is less bullish though as it sees BHP as trading in line with its fair value estimate at current levels, meaning it retains its Hold rating.

Price targets have crept higher given the increases to earnings forecasts and the average price target according to the database now stands at $44.71, up from $44.03 previously. BHP shares today are weaker in line with the broader market and as at 11.50am the stock was down 63c or 1.5% at $42.78.

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