Morgan Stanley Calls BHP Billiton 'A Core Holding,' Upgrades To Overweight

• BHP Billiton Limited (ADR) BHP shares are down 20 percent in first few days of trading in 2016.
• Morgan Stanley’s Brendan Fitzpatrick upgraded the rating for the company from Equal-Weight to Overweight, while raising the price target from A$21 to A$22.50.
• BHP Billiton continues to have sound fundamentals and the markets seem to be over penalizing the stock, Fitzpatrick believes.

BHP Billiton’s shares have declined 39 percent since October 2015. Analyst Brendan Fitzpatrick attributes the decline to market concerns surrounding the combination of a “substantially uncovered regular dividend, financial risk around the Samarco incident and continued discussions by management around growth projects despite weaker cash flow and rising financial leverage.”

Fitzpatrick believes that BHP Billiton is being penalized harshly and that the company’s shares already discount almost a 40 percent dividend reduction. He added, “We agree a cut of this magnitude is necessary, but even on a reduced dividend of US$0.75 the yield is supportive at 6.6%.”

BHP Billiton’s value loss related to Samarco is US $8-9 billion, including US$5-7 billion linked to costs and fines. “That far exceeds indications of the claims by the Brazilian government,” Fitzpatrick pointed out.

The analyst believes that BHP Billiton is not dogmatic about its growth projects and will defer spending according to the changing fundamentals and available cash. The company’s financial leverage remains much better than the peers, especially after the dividend cut.

BHP Billiton’s strength lies in its solid balance sheet, ability to generate FCF on spot commodity prices, flexibility to reduce capex, operate long life of mine assets and sustainable low costs, the Morgan Stanley report added.