Hiking Our Fair Value Estimate for BHP Billiton

On the back of strong 2011 earnings and positive outlook, we are increasing our fair value estimate for BHP Billiton and forecasting solid growth in 2012

Mark Taylor 30 August, 2011 | 9:23AM
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We are increasing our fair value estimate for BHP Billiton (BLT) by 5% and maintain our positive stance. Very strong cash flows leave the balance sheet in better shape than anticipated. Our fiscal 2012 earnings forecast is for 33% increase in earnings versus fiscal 2011, reflecting substantial growth in Western Australia iron ore volume on expansion plans and coking coal volume recovering from fiscal 2011's bad weather. We also anticipate improved performance from aluminium and nickel, veritable laggards in fiscal 2011. We then expect earnings to level off on a cooling in commodities price growth from current stratospheric levels and the impact of the mineral resources rent tax in Australia.

In line with expectations, BHP reported record underlying fiscal 2011 earnings up 74% to $21.7 billion. That's 40% above the previous highest mark of $15.4 billion set in fiscal 2008. Cost pressures are evident, though outside of oil are in line with expectations, given commodities inflation. Most segments experienced 35%-40% rises in unit costs, though some like oil and coal were higher for industry-specific reasons--oil in part because of the drilling moratorium in the United States and coal the weather. Yet industrywide cost pressures, in conjunction with persistent supply-side constraints, are a key plank to commodity price support.

Going forward, BHP anticipates robust commodities demand in both the short and medium term, supported by intensive emerging economic growth--and if stimulatory policy is enacted, then more so. With respect to steelmaking raw materials, the company does anticipate growth in demand, particularly in China, to slow in the longer term to more sustainable levels. But the fundamentals even for these commodities remain compelling, given a constrained supply-side response and rising capital costs.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BHP Group PLC1,867.80 GBX-1.27Rating

About Author

Mark Taylor  is an equity analyst at Morningstar.

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