Security Analysis and Business Valuation of BHP Group Limited

This report provides an evaluation and analysis of the prospects of the future investment proposed to be made by the investor in the future in the BHP Group Limited. It includes the detailed study of its historical financial statement for the past five years starting from the financial year 2014 ending on 2018 so as to get a brief idea of its stock price movements, dividend policy, its capital structure etc.

Intermediate Management
Accounting
Accounting
Assignment

Security Analysis and Business Valuation of
BHP group Limited
Prepared By
Student’s Name:
Date: 12th January 2019
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Executive Summary
This report is intended to provide an evaluation and analysis of the prospects of the future
investment proposed to be made by the investor in the future in the BHP Group Limited. Our
methodology for the analysis includes the detailed study of its historical financial statement for
the past five years starting from the financial year 2014 ending on 2018 so as to get a brief idea
of its stock price movements, dividend policy, its capital structure etc. so as to assist the
investors in making decision to adopt the long term strategy to buy or sell or to hold the
securities of the BHP Group Limited. Further this analysis provides the valuation based on the
present value of the projections of the BHP’s future cash flows from the year 2019 to 2023
including the sensitivity analysis, calculation of the terminal value, weighted average cost of
capital, Discounted cash flow and terminal values, calculation of current share price based on our
projection and making final recommendation on the basis of our finding through the analytical
study.
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Table of Contents
Introduction................................................................................................................ 3
Main Body................................................................................................................... 4
Calculation of the Future Free Cash flows including Sensitivity Analysis....................4
Comparison of the current share price with the estimated price................................4
Recommendation....................................................................................................... 5
References..................................................................................................................... 5
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Introduction
BHP Group Limited established in the year 1851, is engaged in the business of discovering,
acquiring, developing and marketing the natural resources worldwide. There are mainly four key
segments of its business in form of Coal, Iron ore, Petroleum and Copper. It changed its name as
BHP group limited in November 2018 only before which it was known as BHP Billion Limited.
It is further engaged in exploring, developing and producing the Oil and gas properties along
with the development of potash (Abdullah & Said, 2017). It has shown its effectiveness of
business in the process of refining, smelting and mining of the nickel along with the provision of
the various support services. In order have an in-depth insight into its historical performance an
excel sheet has been attached herewith to provide an overview of the Income statement, Balance
sheet and cash flow for the last five years from the year ending 2014 to 2018 for your reference.
If we see its dividend payment history for these five years which are as AUD$1.3, AUD $1.68,
AUD $0.3, AUD $1.08and AUD $1.57 for the year 2014, 2015, 2016,2017, 2018 respectively.
The stock prices in AUD$ 29.71, AUD$22.79, AUD$17.65, AUD$24.09 and AUD $33.93 per
share for the year 2014, 2015, 2016, 2017, 2018 respectively (Boghossian, 2017).
Main Body
Calculation of the Future Free Cash flows including
Sensitivity Analysis
The major factor which are taken into consideration while determining the future sales
projections based on which future cash flows have been generated are as follows:
i. Commodity Price fluctuation and current global economic viability
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The operation of the BHP is primarily exposed to the fluctuations in the prices of the
minerals, Oil and gas. Again because of the trend of the volatile nature of the global
economic growth there is the probability of reducing the demand of the commodities
along with its adverse effect on the prices, hence may affect its growth (Pamela &
Tamara, 2013).
ii. Exchange rate fluctuation
Though BHP’s sales are denominated in dollar, but Operating costs across the various
countries in which it is operated is being denominated in the local currency of that
specific region, hence fluctuation in the same can also adversely impact its operation.
iii. Decrease in demand in the China Market
In recent years there has been the slowing down growth rate of Chinese economy may
cause BHP to reduce its prices of the commodities in Chinese market that may cause
a reduction in its future growth (Cayon, et al., 2017).
iv. Potential impact of the Samar co Dam Project Failure
This is an area where huge uncertainty is being associated with future obligation of
the BHP limited. Hence it may also cause the slow growth rate of sales for the BHP.
v. The effect of climate change in form of chronic change in the weather pattern, policy
and regulatory change, market and economic responses may affect its operation of the
production of fossil fuels like oil and coal and gas (Cundill, et al., 2017).
Considering the above factors as one of those most relevant to be expected to have a
negative effect on the future growth rate of the BHP despite its various risk
management approaches in our estimation of the future year’s sales forecast. Hence
the modest growth rate of 19% for the year 2019, 22% for the year 2020, 25% for the
year 2021, 2022 and 2023 has been taken considering these uncertainties (Charles H,
et al., 2015).
Comparison of the current share price with the estimated
price
It can be seen from the calculation done in cash flow part in the answer No.7, that the current
share price is much higher than the estimated share price or in other words we may say that the
shares are already overvalued. Hence it is better to sell it now
Recommendation
Based on the analysis done in the excel sheet it can be concluded that it is better for the investor
to sell the shares of the BHP group Limited as it is already overvalued and in future it is going to
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decrease only due to the significant risks associated with its operation. The company needs to
make sure that the overall valuation is done in such a manner that correct position based on
financials is reflected to the users and they can judge whether it is correct or not (Johan, 2018).
References
Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate
Crime Tolerance by Accounting Professionals. State-of-the-Art Theories and
Empirical Evidence, pp. 129-149.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic
responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.
Cayon, E., Thorp, S. & Wu, E., 2017. Immunity and infection: Emerging and
developed market sovereign spreads over the Global Financial Crisis. Emerging
Markets Review.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the
more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-
35.
Cundill, G., Smart, P. & Wilson, H., 2017. Non‐financial Shareholder Activism: A
Process Model for Influencing Corporate Environmental and Social Performance.
International Journal of Management Reviews, 20(2), pp. 606-626.
Johan, S., 2018. The Relationship Between Economic Value Added, Market Value
Added And Return On Cost Of Capital In Measuring Corporate Performance. Jurnal
Manajemen Bisnis dan Kewirausahaan, 3(1).
Pamela, K. & Tamara, Z., 2013. Attaining legitimacy by employee information in
annual reports. Accounting, Auditing & Accountability Journal, 26(7), pp. 1072-1106.
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