BHP Billiton - Still the Quality Play

BHP’s strong diversified cash flow and ultra-low debt levels have in recent times set it apart from its peers.  Last week’s 2008/09 full-year results revealed no great surprises underscoring the company’s strengths and ability to cash in on the inevitable world economic recovery. 

Whilst the market had anticipated full-year underlying earnings before interest and tax (EBIT) of around $US17.9 billion, down 26% from $US24.145 billion last year, BHP generated EBIT of US$18.2 billion, an actual fall of 20.5%.  And whilst many have slashed theirs, the company increased its full-year dividend by 17.1% to US 82 cents per share.  

The company also trumped the market’s anticipation of bottom-line profit of around $US5.7 billion reporting a figure of US$5.9 billion. 

So whilst things were tough for BHP, the market had already priced in the bad news, and was pleasantly surprised that there were no hidden ‘nasties’ in the result. In fact, we took comfort from the fact that BHP had used record net operating cash flow to further pay down debt levels to an ultra-low gearing ratio of just 12%. And with such a huge cash accumulation, the company is magnificently placed to fund its huge pipeline of organic growth opportunities. 

What the company’s financial results demonstrate is the value of the diversified resource model, which allows the company to generate strong outcomes even during the worst economic conditions in a lifetime. The company’s portfolio of long-life, low-cost and diversified assets continued to yield strong margins and cash flows, despite the pressures of the current economic environment.  
 
The company’s views on the global economic outlook and the immediate future with respect to commodity demand were also interesting and essentially an extension of the views expressed recently in the company’s June 2009 quarterly operations report. BHP has continued to talk in a cautiously optimistic tone, suggesting that China’s commodity demand will now be more reflective of actual demand, rather than merely restocking.  

With respect to China, BHP commented that the response has seen a sharp increase in investment that has accelerated a range of existing infrastructure and construction projects. In China in particular, re-stocking coupled with stimulus package spending, fuelled strong real demand in key commodity-intensive industries such as infrastructure, construction and real estate.  

With respect to other key markets such as North America, Europe and Japan, BHP believes there is emerging evidence of an improvement in demand, although it believes it’s still too early to tell whether this improvement is driven by re-stocking alone, or a combination of re-stocking and real demand. 

Encouragingly though, BHP in the long term expect to see strong growth in demand for its commodities and as we have previously emphasised, the company has a major advantage over its resource sector peers in terms of its balance sheet strength.  

This strength has allowed it to avoid many of the financing and asset-sale headaches currently occupying the minds of its peers. The company therefore remains in a position of financial resilience that most companies can only dream about.