Half year numbers mostly in line with expectations

Now, we can actually get to the interim results themselves having dealt with the management change over at BHP Billiton. Revenues decreased by 14.1 percent to 32.2 billion Dollars. Phew, that is a big number for a materials company. Underlying EBIT fell 38 percent mostly as a result of inflationary pressures, a weaker US Dollar and of course the most obvious one, lower commodity prices. Better volumes and good cost controls were not enough to offset the decline in underlying commodity prices. Profits excluding exceptionals clocked 5.7 billion Dollars, but attributable profits including exceptional items of 1.4 billion Dollars slumped 58 percent to 4.2 billion Dollars. This is the part that you could be forgiven for thinking that Kloppers was pushed as a result of lower profits. The last time I checked, Marius Kloppers himself had very little sway over commodity prices. The company continued to divest from non-core assets, remarkably asset sales totalled 4.3 billion Dollars (announced and completed) for the half. Astonishing, translate that to Rands at the current exchange rate, 8.835 and you get to almost 38 billion Rands. Or basically a company locally that would just sneak into the top 40. Wow.


The impact of the lower commodity prices was across four divisions, Iron Ore where total price variance was 3.169 billion Dollars. Phew. Metallurgical coal experienced a similar thing, total price variance in this half topped 1.6 billion Dollars. Add in energy coal at 439 million Dollars and the Aluminium and Nickel business at 385 million Dollars, and there you have the difference. Held sway by the fast moving commodity prices and a function of supply and demand, restocking and running down of inventories, who knows the truth behind the Chinese slowing? That leadership change conference in November was key, both to confidence in the Chinese economy as well as the newer leaders being committed to continued infrastructural development. That said, Chinese commodity demand is moderating, expectations are still however that demand growth rates are set to be in the 2 to 4 percent range per annum for BHP Billiton's core products. Energy, copper, iron ore and metallurgical coal no doubt.


The sensitivity of the moves in the underlying commodity prices is remarkable, a one Dollar a ton move in the iron ore price has a 110 million Dollar impact on the company. A one Dollar move in the price of a barrel of oil amounts to a 45 million US Dollars swing. The other big factor is a one cent move in the Aussie Dollar relative to the US Dollar, that swing is as much as 110 million Dollars. All these important swing factors are found on slide 34 of the BHP Billiton interim results presentation. The last slide is most interesting, their three core businesses, the petroleum, iron ore and base metals all separately have higher EBIT margins than the average group margins. Equally, margins have been falling in an "uncertain" commodities pricing environment.

The company announced cost savings of 944 million Dollars, around 1.9 billion Dollars on an annualised basis, shareholders will no doubt be pleased with these initiatives. But the part that we care about most is direction, and perhaps always in the present, valuations. Excluding exceptional items, the company made 106.8 cents per share, a 43 percent drop, but still boosted their dividend by nearly 4 percent to 57 US cents. At current Rand/Dollar exchange rates that translates to 9.43 ZAR of half year earnings and a dividend of 503 cents per share. On these numbers if you annualise the half, the stock is not dirt cheap anymore. But, and this is a big but, I suspect that the gas assets will start becoming more and more important to the future of the company.


The few research notes that I have read so far suggest the appointment of MacKenzie means business as usual at BHP Billiton and no earth shattering deals. The company will continue to invest in their businesses where they see future demand. This is key to the future, it might sound like a simple thing to get right, but this company has importantly the quality, the geographical and commodity mix diversity to see you through the cycles. And the last cycle was severe, about as bad as you are going to see. We continue to recommend this company as the core part of our client portfolios to leverage off the longer term commodities consumption story in developing countries.