BofA Upgrades BHP Billiton To Buy, Says '16 Will Be The Inflection Point

BHP Billiton Limited (ADR) BHP may be poised for an upturn in ROCE. BofA Merrill Lynch’s Jason Fairclough upgraded the rating for the company from Neutral to Buy, while raising the price objective from 825p to 1,250p.

Analyst Jason Fairclough mentioned three reasons for the upward revisions:

1. The company’s ROCE is likely to bottom in the first half of 2016, and reach an inflection point. The ROCE is expected to incrementally increase by 1-2 percent per annum, driven by self-help
2. Valuation is attractive, and there is 39 percent to the NPV
3. While BHP Billiton is surrounded by investor skepticism, headwinds seem to be behind the company

Positioning

Fairclough commented that BHP Billiton continued to be “under-loved in an underweight sector,” facing high investor concern due to its historic poor capital allocation, dilution of returns and the impact on balance sheet.

“With commodities bottoming, capex rolling off materially and the dividend reset, we believe many of these headwinds are now in the rear view mirror as the balance sheet recapitalises and returns lift,” the analyst added.

Reaching An Inflection Point With Self Help

Improvement in commodity prices may not help the company in the near term. Prior to FY18, BHP Billiton’s ROCE appreciation would be driven by higher volumes, margins and asset-turns achieved via the completion of “several large-scale projects in Copper and Iron Ore” as well as reduction in costs, Fairclough mentioned.