BHP Group: Rebasing expectations post demerger
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 26 May 2022, 10:00 AM
- Sectors Covered:
- Mining, Energy
- We have removed BHP Group’s (ASX:BHP) Petroleum business from our group forecasts and valuation.
- Post the changes our valuation-based Target Price has been revised to (login to view) and we maintain our Add recommendation.
- The demerger of its Petroleum business has concentrated BHP’s earnings somewhat, while improving its ESG profile.
- Our positive investment view on BHP is unchanged, while our view on its value has been adjusted for the divestment.
We have removed our estimates for forward earnings contributions from BHP’s Petroleum business segment, and accordingly also removed it from our group valuation on BHP.
In terms of BHP’s altered earnings mix by commodity post the Petroleum divestment (where Petroleum had been 11% of EBITDA in FY22F), BHP’s new EBITDA breakdown by commodity according to our estimates is as follows: iron ore now 54% (was 49%), Copper now 25% (was 23%), Coal now 18% (was 16%) and Nickel now 2% (was 1.3%).
Forecast and valuation update
Our valuation-based Target Price on BHP has been revised to (login to view) post the Petroleum demerger.
We have also removed future earnings contributions from Discontinued Operations in our Profit & Loss forecasts.
Other than rebasing our expectations for life without the contribution from its Petroleum business our investment view on BHP is unchanged.
We continue to see the move as likely to increase the amount of global and domestic investors willing to invest in the company, something that will be further aided by the eventual divestment of its remaining thermal coal assets.
- 4Q22 operational result (19 July)
- FY22 earnings result (16 August)
- COVID related risks to commodity demand drivers, particularly in China.
- Inflationary risks to the cost base across BHP’s global operations.
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