BHP’s medium-term cost guidance for iron-ore and coal is better than expected and will help to underpin EPS targets into FY18 and FY19.
FY18 revenue will be up slightly to $40b, EBIT $13b with reported profit in FY18 forecast to increase 10% to $6.4b.
Assuming dividends per share of $0.80, BHP is placed on a forward yield of 4%.
We see upside in BHP’s share price to $30 and suggest selling a March $29.50 call option to enhance the yield.
The Q1 production numbers for BHP were on the soft side with weaker production and shipments of Iron ore and coal offsetting slightly better output in Copper and Crude Oil.
The company has left its full year guidance unchanged for FY18, despite recent reports that they could miss those production levels by up to 10%.
We expect the recent price volatility in Iron Ore and Coal to impact shares price trajectory well into FY18.
The newly appointed Chairman, Ken MacKenzie, addressed shareholders for the first time yesterday as the share price was pressured back below $26.50.
On balance, we believe that Iron Ore prices are at the upper end of the price range and a pullback into the $25.00 range is a reasonable buy level for BHP.
BHP
Chinese import data released on Friday showed a surge of 18.7% on a year-on-year basis.
Leading the the stronger import numbers was Iron Ore.
Purchases of Iron Ore expanded to 102.8 million tons compared to 93 million tons during the same time last year. Compiling the data for the first nine months of 2017, full year purchases are on course to top 1 billion tons.
Shares of RIO and BHP have responded by rising by 2% and 2.5%, respectfully, in early trade
China will convene its five-yearly congress on Wednesday. Some reports suggest that the rise in raw material imports into the lead-up of the Communist Party meeting may not be sustainable.
Looking at the daily charts, we see near-term resistance for BHP at $27.50 and at $70.70 for RIO.
BHP
Rio Tinto
The XJO 200 Index continues to trade within a broad, sideways “Flag” pattern bound by the June 8th low of 5624 and the June 15th high of 5834.
The low price for the week at 5637 was the result of weakness in the banking names, as well as, a drop in major miners BHP and RIO; which lost 2% and 1.5% for the week, respectively.
The continuation of the “lower high” price pattern suggests a downward bias with the next key support level near the February low of 5578.
ASX XJO Index
Our ALGO engine triggered a sell signal in the BetaShares Resource ETF with the symbol QRE at $4.85.
QRE is comprised of 10 ASX stocks which include BHP, Bluescope Steel and Caltex. The weighting is such that BHP, RIO and WPL make up over 50% of the ETF pricing.
Frequent blog readers will remember that we had a generally bullish outlook on the resource sector back in mid-March, and advised clients to buy QRE in the $4.50 area and BHP in the $22.50/70 price range.
We now agree with the ALGO engine that the resource names look fully valued overall.
We suggest that investors who are holding BHP can either take profits in the $26.25/50 area, or write covered calls at $26.50 into November to enhance portfolio returns.
BetaShare ASX Resource ETF: QRE
BHP
Shares of BHP are up over 1% in early trade as the mining giant announced a USD 6.73 billion full year profit and declared a final dividend of 43 cents per share, which lifts the full-year dividend to 83 cents per share.
Higher prices for both Iron ore and Coking Coal helped contribute to the improved performance over the course of the year.
The company also announced that it wants to sell off its US Shale oil assets, as they have not performed to plan.
In our blog update from July 26th, we suggested that investors could sell European-style call options at the $26.00 strike price into November.
We still see limited upside to BHP above $26.50 and repeat that suggestion to enhance portfolio returns for investors holding BHP shares.
BHP
Following recent Algo Engine buy signals, we continue to hold WOW, BHP and ORG as preferred holdings.
In late May our Algo Engine started flagging the “higher low” structure in large cap resource names, including a number of resource specific ETF’s.
Within the ASX 100, FMG, RIO and BHP were the standout Algo Engine buy signals. In client portfolio’s we allocated towards BHP as our preferred exposure.
Over recent weeks, a rally in Iron Ore prices from US$56 per tone to US$72 per tone, has helped to accelerate the share price advance, and crude oil back at almost $50 per barrel has helped BHP.
Fund managers continue to position in BHP ahead of a potential corporate restructure, as the market speculates on the divestment of the US shale and energy assets, into a separate listed US company.
BHP reports on the 22nd August . Assuming FY17 total dividends of $1.10, BHP trades on a 4.7% yield. EPS forecasts into FY18 should remain similar to FY17 at around $1.70 per share.
Recent Algo Engine buy signals in BHP and WOW continue to perform strongly.
An overnight rally in metal and oil prices will support BHP in today’s trading and investors may wish to consider selling covered calls into November, at or near the $26 strike price.
Woolworths reports earnings on the 23rd August and the market will be looking for underlying EPS growth of 8% to support the 22x earnings multiple.
With WOW now trading on forward yield of 3% and a relatively high multiple, we encourage investors to sell $28 Dec call options to boost the annual cash flow return.
We’ve been buyers of BHP on the recent pullback to $22.50 with an upside target of $25 – $26.
We advise, either locking in gains within this price range, or alternatively, selling at-the-money call options into September.
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