RBC No Longer Hates BHP Billiton: Should You?
- BHP Billiton Limited (ADR) (NYSE: BHP) shares are down 31 percent year-to-date, and are trading significantly below their 52-week high of $69.88.
- RBC Capital Markets’ Timothy Huff upgraded the stock from Underperform to Sector Perform, while raising the price target from £12 to £13.
- Huff believes that BHP’s new capex flexibility and willingness to reduce opex and capex over the next two years should allow the company to withstand a prolonged period of weakness in commodity prices.
Analyst Timothy Huff said that BHP Billiton has shifted its focus from growth capex to paying dividends. “We think the emphasis on paying the dividend before growth capex is not only a strong commitment to cover the dividend, but also shows a new flexibility with which management now views growth capex.”
RBC Capital Markets noted, “BHP is now almost directly matching RIO cost guidance in iron ore and aiming for US$15/t of C1 for WAIO in FY16, while also stating that internal cost aims are stronger than the revised guidance figures.”
BHP Billiton reduced its capex guidance for FY16 to $8.5 billion, in-line with the RBC Capital Markets forecast. The company’s capex guidance for FY17, at $7 billion, is short of the RBC estimate of $8 billion.
“With BHP also delivering cost savings of over US$4bn in FY15 (one year earlier than we were anticipating) BHP is now beating our low end cost forecasts across the board,” Huff commented.
The analyst believes BHP Billiton is a “high single digit free cash flow yielding stock” that currently does not fully reflect the potential cost gains from capex, working cap and iron ore in the next two years.
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