Bhp Billiton finals

A diversified natural resources company and among the world’s largest producers of major commodities, including aluminium, coal, copper, iron ore, manganese, nickel, silver and uranium, and has substantial interests in oil and gas.  I have a holding in my income portfolio (epic code: BLT).

Bhp Billiton announced their full year results today and although production was up 9% (commented on here), weaker commodity prices meant sales increased by just 1.9% to $67.2bn.

 

Reported EBIT was up 11.5% to $23.4bn, this reflected $0.5bn of gains on asset sales compared to net impairment charges after gains on asset sales last year of $1.9bn, consequently underlying EBIT was flat.

 

EPS was up 23.3% to $2.59, reflecting exceptional gains this year of $0.5bn compared to exceptional charges of $1.9bn last year, lower interest costs of $0.1bn and a reduced tax charge of 31.5% compared to 35% last year. 

 

A final dividend of 62c was declared to make a total dividend of $1.21 for the year an increase of 4.3% on last year.  Sterling holders at current exchange rates ($1.67=£) are likely to see a decline of ~4.5% to about 72.36p from (35.23p interim + 37.13p est. final) 75.82p last year.  The dividend is covered 2.1x by earnings and 1.4x by free cash flow (FCF).

 

FCF was improved this year to $8.9bn from an outflow last year of -$2.8bn as operating cash flow (OCF) was improved by $5.2bn and capital expenditure reduced by $6.5bn.  BLT has much to do here as currently their 3 year average FCF return on their 3 year average capital employed is below their working average cost of capital (WACC) by over 7.5%.  I have used three years to smooth out timing issues on working capital. 

 

After a dividend bill of $6.6bn and other net sundry payments from the FCF, net debt was reduced by $1.7bn to $25.8bn, this represented gearing of 33% and was just 0.8x EBITDA with the OCF at a comfortable 98% of net debt.  Interest was covered 20x.

 

BLT also announced plans for the demerger of its aluminium, coal (energy), manganese, nickel and silver assets.  This newco., of which current shareholders will receive 100 per cent of the shares through a pro-rata distribution, will only be listed in Australia and South Africa.  Many UK private and institutional shareholders, will likely choose/have to dispose of this holding, incurring overseas transaction costs, unless special provisions are put in place.

 

As I write the share price is down over 4% to 1980p, there would have been some profit taking as the SP had moved up lately from the lows of 1850p in mid June, but there will be some unhappiness with the process of the demerger, as clearly many UK shareholders would have no interest in an Aussie listed stock; far better would have been an IPO with proceeds distributed by way of a return of capital. 

 

On the outlook for BLT management have stated "...We expect to maintain strong momentum and remain on track to generate Group production growth of 16% over the two years to the end of the 2015 financial year...." and "...With a simpler portfolio, we are targeting at least another US$3.5bn of productivity-related gains by the end of the 2017 financial year..."

 

I purchased BLT foremost for the yield and portfolio diversification, with an expectation of above inflation dividend increases from an improving FCF and likely asset sales with a return of capital or special dividends from those disposals.  The demerger will involve more cost and effort on my part, but the result may not be too far off what I hoped for (depending on the detail) and sooner, but maybe someone like Glencore will come in for the "to be demerged" assets and offer a good price, making the whole process simpler and possibly more rewarding.