The paper would critically evaluate the financial performance of an ASX listed organisation for providing financial advice to a wealthy investor. For this paper, BHP Billiton has been chosen as the organisation and its financial position would be assessed in order to provide advice to the client. The annual report of the chosen organisation will be analysed effectively to gain an understanding of its corporate governance structure as well as its ownership structure. Various types of ratios would be calculated in the context of the organisation to suggest whether investing in its share would be a feasible option for the investors.
The historical stock prices of BHP Billiton would be taken into consideration and the trend would be compared with that of the All Ordinaries Index. This would help in obtaining an overview of the share price movements of the organisation and its correlation with the index over the past two years. The capital structure of the organisation would be analysed with the help of debt ratios and accordingly, its dividend policy would be identified as well as assessed. Finally, the paper would shed light on writing a recommendation letter, which would include detailed suggestions regarding the investment opportunity in BHP Billiton.
BHP Billiton is an Anglo-Australian organisation dealing with metals, mining and petroleum. The organisation is established in the year 1885 and it is headquartered in Melbourne, Victoria, Australia (BHP 2018). It has been the largest mining firm in 2017 in terms of market capitalisation and the third largest firm in Australia in terms of revenue. This is because the revenue base of the organisation was increased thrice between 2004 and 2012. It is involved in extracting and processing oil, minerals and gas having above 60,000 employees and contractors mainly in America and Australia. At the time of its establishment, the initial ventures of the organisation were lead and tin smelting in the Netherlands followed by bauxite mining in Suriname and Indonesia. However, the lead and tin smelting operation was closed in 1990 and in 1997; it got listed on the FTSE 100 index. However, it has experienced a massive loss of $6.4 billion in 2016.
The purpose of the organisation is to develop long-term shareholder value via acquisition, discovery, marketing and development of natural resources. In addition, it is considered in the list of the global leading producers of significant commodities that include metallurgical coal, iron ore and copper. Substantial interests of the organisation could be observed in gas, oil and energy coal (BHP 2018). Its products are sold widely in the international market, while sales and marketing activities of the organisation are carried out through Houston, Singapore and United States.
There are substantial shareholders holding a significant portion of ordinary shares in BHP Billiton. Some of the major shareholders of the organisation are identified as follows:
|
Shareholder names |
Ordinary shares held |
Percentage of shares held |
|
Andrew Mackenzie |
266,205 |
38.31% |
|
Mike Henry |
196,262 |
28.25% |
|
Malcom Brinded |
60,000 |
8.64% |
|
Pat Davies |
27,170 |
3.91% |
|
Anita Frew |
15,000 |
2.16% |
|
Wayne Murdy |
24,000 |
3.45% |
|
Jac Nasser |
81,200 |
11.69% |
|
Shriti Vadera |
25,000 |
3.60% |
|
Total |
694,837 |
100% |
According to the above table, it could be found that BHP Billiton has two shareholders holding above 20% of ordinary shares in the organisation. The two individuals are Andrew Mackenzie and Mike Henry holding 38.31% and 28.25% of the total ordinary shares (Bhp.com 2018). In a similar manner, the shareholders holding above 5% of the ordinary shares include Jac Nasser and Malcom Brinded with 11.69% and 8.64% respectively. Based on the categorisation of shareholdings, it could be identified that no two individuals jointly own the same ordinary shares. Therefore, it could be categorised under the non-family company.
The governance structure of BHP Billiton includes the board of directors as the chairperson of the board and other non-executive members and they are considered independent. BHP Billiton is observed to have four members in its governance committee and they include the following:
The above table mainly helps in identifying those individuals that are involved in the governance process of BHP Billiton. Jac Nasser is the chairperson of the board and the other members are the non-executive directors of the organisation. From the above individuals, only Jac Nasser holds above 5% of the shareholdings, while Shriti Vadera holds below 5% of the shareholdings. The other two members, namely, Carolyn Hewsin and John Schubert do not own shareholdings of BHP Billiton despite of their involvement in the governance structure of the organisation. Hence, this further validates the fact that BHP Billiton could not be categorised in the form of a family company, since not more than one member are involved in the corporate governance of the business organisation.
Figure 1: Share price movement of BHP Billiton and All Ordinaries Index from 2016-2017
(Source: Asx.com.au 2018: Finance.yahoo.com 2018)
The above figure mainly helps in depicting the monthly share price movement of BHP Billiton in contrast to that of the All Ordinaries Index for the past two years (Finance.yahoo.com 2018). From the figure, it is clearly evident that the average monthly return on the share price of BHP Billiton has been higher than that of the All Ordinaries Index for most of the times in the stated period. Limited instances are present, in which BHP Billiton has failed to provide more returns as opposed to the returns of the All Ordinaries Index. In June 2016, it could be found that the organisation has provided a return of 5.90%, while the return provided by the All Ordinaries Index has been 6.28%. However, in the next month, which is July 2016, it could be observed that the return of BHP Billiton was 3.96%, while the All Ordinaries Index provided a negative return of -2.03%. The only exceptional instance could be observed in May 2016 where both the stock and the index fetched negative returns and negative return was higher for the stock rather than the index. However, most of the times in the two years, the stock performance of BHP Billiton could be considered superior than the All Ordinaries Index. The monthly return over the two years of BHP Billiton could be analysed separately, which is illustrated as follows:
Figure 2: Monthly share price movement of BHP Billiton from 2016-2017
(Source: Finance.yahoo.com 2018)
According to the above figure, it could be evaluated that BHP Billiton has maintained a stable share price over the years. No such fluctuations could be observed during this period; instead, the trend is always on the rising scale after the mid 2016. However, questions could be raised regarding its positive stock price movement in 2016 despite the fact that it has suffered significant loss in the year. This could be better explained with the logic that the share price of BHP Billiton is overvalued in relation to the future revenue streams and the index where it is listed (Brooks 2015).
There are certain significant announcements that could influence the share price of BHP Billiton and they are summarised as follows:
Delivering value and returns:
According the CEO of the organisation, the strategy of the organisation to ensure shareholder value and higher commodity prices has helped in increasing its return on capital employed by 30% over the past two years (BHP Billiton 2018). The organisation has concentrated on six main value drivers that include unit cost reduction, acceleration of innovation and technology program, invested in high-return latent projects along with making inventions at four petroleum exploration prospects. Moreover, net debt has been minimised by $10 billion, while $8 billion is provided to the shareholders. All these factors have attributed significantly to the rising share price of the organisation (Dhaene et al. 2017).
Samarco update:
The Samarco dam failure case is going on in the 12th Federal Brazilian court for continuing the discussions on the framework negotiation to settle the public civil claims associated with the failure. The extension period is up to 25th June 2018. During this time, the organisation could not make interim security arrangements and it would have to abide by the suspension of legal proceedings. This could minimise the share price of BHP Billiton, if favourable outcome is not obtained from the court in future (Ehrhardt and Brigham 2016).
Investments in 10 deserts project:
BHP Billiton has invested $21 million in 10 deserts project for developing environmental resilience throughout the desert along with sustaining the biggest indigenous-led associated global conservation network. This would help in creating employment and training opportunities and thus, it could secure revenue streams and long-term funding (Ferran and Ho 2014). As a result, it would help in ensuring positive share growth of the organisation in the stock market.
Industry Association Review:
BHP Billiton is determined in seeking the membership of the “United States Chamber of Commerce” and “World Coal Association”. It has provided an update about its thought on the new energy and position of climate change associated with the “Minerals Council of Australia”. If it manages to obtain the membership, positive brand image would be created in the eyes of the shareholders and adequate funds could be raised through equity (Foley and Manova 2015). As a result, positive increase in share price of the organisation could be seen in future.
Installation of new plant in Latin America:
BHP Billiton has installed a new plant in Latin America for meeting the demand for its productive work. In order to set up the plan, it had to invest $3,230 million. Although positive cash flows are expected to be earned in the upcoming years, any inflationary effect might minimise the same and the effect would be adverse on the share price of the organisation (Fracassi 2016).
The beta computed for BHP Billiton in the year 2017 is provided as 1.34.
Based on the above evaluation, it could be stated that BHP Billiton is a conservative investment, as it has made huge net earnings in 2017 compared to the other organisations operating in the Australian mining sector. The fall in net expenses could be observed in 2017, while the revenue has increased by above 24%. Another reason for which investment could be made in the shares of the organisation is the stability in its share price over the past two years. This is due to the fact that the organisation uses its asset base effectively for expansion purpose than any other mining organisation in the Australian market. A positive return on assets of 5.32% could be observed in 2017, which was negative to -5.22% in 2016 and the former rate is superior to the industrial average (Titman, Keown and Martin 2017).
Moreover, another reason that would motivate the investors for making this conservative investment is that BHP Billiton has managed to reduce its net debt with the help of operating cash flows, as revenue streams are generated from investments in new projects. In addition to this, the operating income earned is sufficient to meet its finance costs and thus, it denotes better solvency position in the mining industry of Australia (Gitman, Juchau and Flanagan 2015). Increase in dividend per share could be observed as well, which implies that stable returns are provided to the shareholders over the years despite the fact that it has suffered the worst loss of the decade in 2016. Hence, these are all the reasons that would motivate the investors to invest in this conservative stock of BHP Billiton (Titman and Martin 2014).
If the WACC of an organisation is high, it is an indication that the organisation carries greater risk related to its business operations. In this context, Gullifer and Payne (2015) advocated that positive returns are always desirable for the investors, if they undertake risky investments. The role of WACC here is to serve as a significant measure for ascertaining the estimated cost associated with funding the total resources. The major components include the payments of clearing the debt obligations or the amount involved in debt funding along with the rate of return (Vernimmen et al. 2014). This is significant for the ownership of management along with cost associated in equity funding.
It has been observed that different financing sources are available to the business organisations. In such situation, WACC helps in establishing a balance among the various costs, mainly debt and equity, for providing a single figure to be used as the discounting factor (Hillier et al. 2014). In other words, it could be stated that WACC involves the amount involved in obtaining one excess dollar. Moreover, there is high chance that concerns would be raised on the part of the investors; if they find that the actual return is below the WACC rate. This clearly highlights the fact that the business organisation might be expected to experience a fall in enterprise value, as there would be lower opportunities to provide the shareholders with greater returns. Under such circumstances, the shareholders might withdraw their investments from BHP Billiton and they would seek to invest in another firm providing greater returns (Jordan 2014).
From the financial gearing ratios, it could be found that the debt ratio of BHP Billiton has fallen from 0.98 in 2016 to 0.87 in 2017. This clearly denotes that the organisation has raised most of its funds by obtaining loans from the Australian financial institutions. However, the optimal capital structure in the Australian mining industry is observed to be 0.5 (Scholes 2015). In this case, it could be said that optimality is not maintained in relation to the capital structure of the organisation.
It is noteworthy to mention that most of the non-current debt repayments of BHP Billiton are made through operating cash flows and it is expected to improve the capital structure of the organisation in the long-run in the Australian market. Moreover, the operating profit is used for minimising the interest expense on debt. Finally, it has placed emphasis on raising additional funds by issuing equity shares in the market, which has fallen in the year 2017 to $60,071 million from $62,726 million in 2016.
Based on the market investment ratios, it could be found that the dividend per share of BHP Billiton has increased from 54 cents in 2016 to 78 cents in 2017. This is because the board of the organisation is always planning to devise out new strategies that would maximise the overall wealth of the shareholders. Thus, it could be stated that BHP Billiton has been following the stable dividend policy, as it has increased its dividend payments over the years. Thus, it could be stated that this policy would help in ensuring stable returns to the shareholders. In addition, BHP Billiton has announced additional dividend payment of 3 cents per share in 2018 and the dividend reinvestment plan is applied as well.
After carefully evaluating all the financial aspects of BHP Billiton, some interesting insights are obtained, which would help in undertaking investment decisions. The recommendations are provided mainly for ensuring that better returns are received in future. If emphasis is kept on the monthly share price of the organisation over the past two years, it could be seen that it has varied between 27 cents and 45 cents. Moreover, BHP Billiton is one of the leading mining firms operating in the Australian market for decades and therefore, it has managed to develop positive brand image in the market. In addition, it could be identified that the organisation has provided positive returns to its shareholders in the two years. Hence, purchasing the shares of BHP Billiton at a stable price would be a feasible investment.
Along with this, it has generated positive operating cash flows and they are used to cover up the net debt. Significant improvements could be seen in the profit level of the organisation as well due to reduction in net expenses over the years. The dividend payments tend to increase with the passage of time. Therefore, an investment decision in BHP Billiton would be a sound alternative.
It is expected that the provided information has met the needed purpose and any further assistance, if needed, would be provided as well.
Conclusion:
Based on the above discussion, it is inherent that even though BHP Billiton has suffered massive loss in 2016, it has improved its position significantly in 2017. The reasons include minimisation in net expenses, net debt, rise in net operating cash flows and others. Growth in profit and revenue could be cited as other reason behind the progress of BHP Billiton in the Australian mining industry. Hence, it could be inferred that BHP Billiton is a feasible investment option, as stable and positive returns are expected to be earned in future based on the prevailing market conditions in Australia.
References:
Asx.com.au., 2018. Home – Australian Securities Exchange – ASX. [online] Available at: https://www.asx.com.au/ [Accessed 24 May 2018].
BHP Billiton., 2018. BHP Billiton | News releases. [online] Available at: https://www.bhp.com/media-and-insights/news-releases [Accessed 24 May 2018].
BHP., 2018. BHP Billiton | A leading global resources company. [online] Available at: https://www.bhp.com/ [Accessed 24 May 2018].
Bhp.com., 2018. [online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf [Accessed 24 May 2018].
Brooks, R., 2015. Financial management: core concepts. Pearson.
Dhaene, J., Hulle, C., Wuyts, G., Schoubben, F. and Schoutens, W., 2017. Is the capital structure logic of corporate finance applicable to insurers? Review and analysis. Journal of Economic Surveys, 31(1), pp.169-189.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Finance.yahoo.com., 2018. [online] Available at: https://finance.yahoo.com/quote/BHP/history?period1=1451586600&period2=1514745000&interval=1mo&filter=history&frequency=1mo [Accessed 24 May 2018].
Finance.yahoo.com., 2018. [online] Available at: https://finance.yahoo.com/quote/%5EAORD/history?period1=1451586600&period2=1514745000&interval=1mo&filter=history&frequency=1mo [Accessed 24 May 2018].
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Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
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Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.
Titman, S. and Martin, J.D., 2014. Valuation. Pearson Higher Ed.
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