I honestly don’t think I can go to another large-cap results presentation after sitting through two hours of analysts’ questions to BHP Billiton’s management last night. The questions were all modelling-based, all focused on capital expenditure, and all long-winded.
I genuinely think most of the analysts only ask questions as a way of promoting their employer’s brand on a global conference call.
What made me laugh was many of these same BHP analysts described the company’s US$21.7bn underlying profit for fiscal 2011 as “disappointing” or “below expectations”. Ahh, not quite fellas. This time 12 months ago the consensus was for a net profit after tax (NPAT) of US$16bn.
In the last few weeks since BHP reported its full-year production figures, the consensus’s expected profit has gravitated up to US$22bn. While yesterday’s number was slightly short of that, the result delivered was 35% above the ‘real’ consensus forecast set 12 months ago.
For all the endless questions about capex last night, the only two variables you needed to get right in fiscal 2011 for BHP were commodity prices and costs. The rest was broadly irrelevant.
Commodity prices were the main driver of BHP’s profit growth, while costs in Australian-dollar exchange rates held the profit back.
The standout feature of the BHP result is its cash flow generation – about $30bn in operating cash flow – up 78% – is a monster number.
Just like RIO Tinto, BHP – despite its diversity – is now highly leveraged to iron ore prices. Every $1 move in the spot price of iron ore is worth about $90mn NPAT to BHP.
I’ll stop there on BHP (see our ‘buy’ recommendation below) and only add that I suspect even BHP management will be focused on US Fed chairman Ben Bernanke’s speech in Jackson Hole, Wyoming this weekend. The equity and commodity markets are like drug addicts waiting for the next hit from the Fed. Unfortunately, withdrawal symptoms can be painful and lead to mood swings, which in a market sense equals volatility.
The markets are putting way too much emphasis on Bernanke’s speech (which will be on Friday night, our time). My personal view is it’s going to be a giant fizzer where Bernanke simply reaffirms the Fed’s commitment to two years of zero interest rates.
If I’m right and the markets don’t get their next quantitative-easing hit from the Fed, be prepared for some moody behaviour.
It seems the extreme safety trade has unwound a notch overnight in the form of gold retracing to $1,750 after bobbing above $1,900 yesterday, but now the markets have set themselves up for disappointment. I’d take any early weakness in gold equities as a buying opportunity (NCM, BDR and CQT are our high conviction buys).
Gold equities have badly lagged the gold spot price. I think that’s about to change in Australia as gold equities start to play catch up. The sector will also be one of the very few being supported by positive earnings, dividend and valuation revisions.
Anyhow, keep your seatbelts fastened, this volatility is going to continue and I encourage you to remain conservatively positioned in high-quality, liquid companies with yield support.
BHP Billiton Ltd (ASX:BHP) – Buy
BHP’s full-year results were solid with strong cash flow generation and a generous US55 cent dividend. Its underlying earnings were US$21.7bn. We continue to rate BHP as a ‘buy’. BHP remains cheap and it has a strong platform of capital expenditure expected to total some US$90bn over the next five years. This will underpin organic growth for the next decade. BHP stands out as one of the best-managed companies in the Australian market, which is matched globally with a market capitalisation ranking in the top 10 in the world. Our target share price is $57.64.
Challenger (ASX:CGF) – Buy
We have a strong ‘buy’ on Challenger, which has gone against the grain and continued to post double-digit earnings-per-share growth. CGF delivered a strong result on Monday with a glowing outlook statement. We believe the company is well placed to continue its growth trajectory. Increased share market volatility has increased the appeal of annuities, and CGF’s retail annuity sales finished the year strongly with $450mn, versus our $400m estimate. Its final dividend of 9.5 cents per share was also slightly above our expectations. Our target share price $6.20.
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