Financial Performance and Valuation Analysis of BHP Company

This report provides a detailed financial analysis of BHP, evaluating its performance and valuation metrics. The analysis begins with an introduction to BHP, a multinational metals, mining, and petroleum company. The report calculates the intrinsic value of BHP's shares using the dividend discount model, concluding that the shares are overvalued. It then assesses the impact of a proposed bond issuance on the company's share price, considering factors such as coupon rates, maturity, and yield to maturity, and providing recommendations to investors. The report also examines BHP's price-earnings ratio and dividend yield, comparing them to competitors to assess relative performance. Furthermore, it analyzes the risk and return profile of BHP based on its share price history, considering both short-term and long-term perspectives. The report concludes with recommendations for investors and explores alternative financing options for the company.

FINANCIAL PERFORMANCE

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
ANALYSIS......................................................................................................................................1
2.1.................................................................................................................................................1
2.2.................................................................................................................................................2
2.3.................................................................................................................................................4
2.4.................................................................................................................................................5
2.5.................................................................................................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
Financial performance is subjective measure about how well the firm could use the assets
from primary mode of the business and could generate revenues. It also refers to measure of the
overall financial performance of the company during given time period. BHP is trading entity of
the BHP Group and Anglo Australian multinational metals, mining and petroleum listed public
company which is headquartered in the Melbourne, Victoria, Australia. BHP is dual listed
company which are BHP Biliton Limited and British BHP Biliton plc are listed separately with
separate shareholders, conducting business as single operation with common board of directors
and single management structure. The company is a multinational company serving round the
world. Total revenues of company in 2019 were US $44.288 billion and net income of US$
9.185 billion. Total assets of company were US $100.861 billion and equity of of US$ 47.240
billion. It is performing well in the market and is growing at constant rate.
ANALYSIS
2.1
Intrinsic value of share price of BHP
Dividend 0.765
Growth 1.50%
Re 5.00%
Price =
Dividend /
( Re –
Growth)
0.765*(1.015)
(0.05 – 0.015)
Share Price of BHP 22.185
Intrinsic value of the share is price for share which is solely based over factors inside
company. This excludes the external factors of the market prices. Share price could be calculated
using dividend discount model and other methods. Dividend growth model uses dividends paid
by the company and the growth with which dividends will be increasing (Grifell-Tatjé and
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Lovell, 2018). It uses three main factors which are dividend paid by company, required rate of
return and growth rate.
The intrinsic value of BHP shares is $22.185 which means the shares of company are
overpriced. Investors in such situations are suggested to sell the shares as price of share may fall
in coming future. Current market price of shares is $38.640 which shows that stocks of BHP are
highly overvalued and investors should go short on shares.
2.2
Bond Price of the BHP
Company is proposing to raise $10 million for the business expansion through sale of
bonds. Bonds will have face value of $1000 with coupon rate of 3% and maturity of 10 years.
Bonds are highly used by organisations for raising funds from the market due to its low cost and
due to the increased benefits associated with them. Bonds allow company to claim benefits of
tax. It is essential for the organisation to assess the source of capital which will be most
beneficial for the business for continuing the business operations (Oyewumi, Ogunmeru, and
Oboh, 2019).
Computation of bond price
Amount to raise 10 million
Nominal value 1000
Coupon rate 3.00%
Maturity 10 years
Yield to maturity 4.00%
(Based on ASX)
C PVIF(4%,10)+1000 PVAF(4%,10)
(30*8.12)+1000*0.6576
Price of Bond 918.2
Bond price is computed on the assumption that yield to maturity on bond is 4%. It could
be evaluated from the above calculation that bond price is $918.2 with yield to maturity of 4%
and coupon rate of 3%. The bond price is lower than the denominated value which shows that the
bonds should be issued by company at discounted price.
Effect on BHP share price due to the decision of raising funds
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The current market position of company is strong and stable. The share prices of the
company are raising continuously with slight fluctuation in its prices. The decisions of company
have direct impact of the share prices due to market forces. If the decision taken by company is
likely to affect the profitability and returns of the business the share prices will show downfall.
On the other if any decision or proposed project will be raising the returns and expand the
business share prices will show upward movement. Every decision of the management will
influence the market of the share of company therefore it is essential for the management to take
decisions analysing the consequences over business.
Due to the decision of raising 10 million share price will fall as due to bonds profits
available to shareholders will reduce. Company will be required to pay interest over bonds and
also to make repayment on maturity. Bonds increase the financial liability of the business
increasing the financial risks of business. Company with higher financial risks face fall in prices
of stock (Sanderson, 2019). However, certain stock with high risks have higher returns whose
share prices do not show downward movement. Currently stocks of BHP are priced at $38.4 and
the market have shown declining trend over few months. The decision of company for raising the
funds via bond will increase the financial obligations due to which investors who are risk averse
will shit their holding from BHP to other companies that are less risky and providing adequate
returns to shareholders.
If the bonds yield will decline the stocks of BHP will outperform and if yields are
increasing equity margin go downs. The results are seen generally long run. Investors assess the
business with the bonds yields as opportunity cost by investing in the equities. For Instance if the
return of equity is lower than the bond yields share prices will be falling and becoming less
attractive to the investors as opportunity cost of investing in equities will be more higher. Also if
the current market conditions and slowing economy investors will be more attracted towards
investments that will provide them fixed returns as in slowing economy profits of company fall.
Recommendations to share investor.
The investors of BHP should buy the shares as the yield on bond is less than the yield of
earnings. Low yield will move the demand from bonds to shares which will increase the share
rices of the company. Investing in shares of company would be profitable for the business in
place of bonds. The company will be required to fix coupon rate over bonds and it will be paid at
fixed rate. Company is recovering after the pandemic and will provide required returns over the
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business to shareholders (Beck, Frost, and Jones, 2018). Investing in bond will provide the
shareholders who are risk averse due to the economic situations with fixed rate of earnings.
Financing options it could adopt
There are also other financing options that could be adopted by BHP such as equity
capital where it will not be required to interest when company is not having adequate profits.
However the cost of equity is higher than bonds and no tax benefits are available to company. It
could also raise funds by raising term loans from banks or financial institutions where they may
propose to pay instalments every year with principal or interest only loan where principal will be
paid after expiry of the term.
2.3
Price earning ratio and yield of the BHP and analysing the relative performance of BHP.
Price earning ratio is widely used metric for the investors and the analysts for
determining values of stocks. The ratio is also used for analysing whether stock prices are
undervalued or overvalued. It allows company to determine market values of the stock as
compared with earnings of company. It analyses what market is willing to pay at present for the
stocks based over future or past earnings. High P/E ratio could mean that price of the share is
relative and overvalued.
Company pay dividends to the shareholders for attracting the investors. Dividend yield
over share simply means that annual dividend is expressed as percentage of share price. For
instance if dividend is 5c per year per share and share price is $1, yield on dividend is 5%.
The Price earnings and yields of BHP and competitors
BHP FMG RIO NCM
P/E 16.36 7.86 15.23 26.23
Yield 4.69% 9.99% 5.81% 1.12%
Share price 38.64 17.985 99.14 31.45
From the above table of P/E and yield it could be evaluated that NCM is having P/E and
BHP is having second highest. It shows that the shares of company are not overvalued. Company
has been performing well over the years with global expansion of its various projects. Yields of
company are relatively lower as compared with the other market competitors ((ASX, 2020)). P/E
of BHP is higher but yield are lower from which it could be framed that share prices of company
are overvalued. Share prices of BHP are high as compared with the competitors due to price
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earnings which are also high. The performance of the company is good as compared with the
competitors it is having higher earnings and generating adequate yields.
2.4
Risk and Return profile of BHP using share price history
In a company high risk is associated with high probability of greater returns and the low
risk with the high probability of small return. The trade faced by the investors in risk and return
is known as the risk return. It could be evaluated from the share price history that shares shows
fluctuating trend over the years. It could be analysed that the investors in the short run have to
take high risks for the returns (Paynter, Halabi and Tuck, 2019). Prices have shown decline in
2019 to 2020 due to the pandemic. In the long run it could be seen that the shares have shown
growth. In the long run shares are providing higher returns that decreases the risk associated with
the shares. Looking at short run the share have high risks and returns are low. The share have
risks higher than the return in short run. Investors that are risk averse will not be investing in
such company where risk taker will be investing in company for higher returns.
2.5
Conclusion and Recommendations
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BHP is a big multinational company which is strongly performing in the market.
Company has been performing well and has achieved significant growth over the five years. The
share prices of company are currently trending at $38.64 with increase. The investors who are
risk taker can earn high returns with the company. The pandemic has affected the company tool
with economic slow of world. Due to this return will be also affected as company has not made
adequate profits in current year. Company for raising funds should go for equity options as they
do not increase the financial obligations of the business and the same time company would not
be required to pay fixed returns in case where profits are low.
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REFERENCES
Books and Journals
Grifell-Tatjé, E. and Lovell, C.K., 2018. Productivity and financial performance. In The Oxford
Handbook of Productivity Analysis (p. 329). Oxford University Press.
Sanderson, L.B., 2019. The performance of debt and equity markets in Anglo American Plc and
BHP Billiton Plc in the period 2006 to 2015 through the lens of Merton's structural
model. South African Journal of Economic and Management Sciences. 22(1). pp.1-9.
Beck, C., Frost, G. and Jones, S., 2018. CSR disclosure and financial performance revisited: A
cross-country analysis. Australian Journal of Management. 43(4). pp.517-537.
Oyewumi, O.R., Ogunmeru, O.A. and Oboh, C.S., 2018. Investment in corporate social
responsibility, disclosure practices, and financial performance of banks in Nigeria. Future
Business Journal. 4(2). pp.195-205.
Paynter, M., Halabi, A. and Tuck, J., 2019. Storytelling and Corporate Social Responsibility
Reporting: A Review of BHP 1992–2017. In The Components of Sustainable
Development(pp. 205-230). Springer, Singapore.
Online
ASX. 2020. [Online]. Available through :
<https://www.asx.com.au/asx/share-price-research/company/BHP>.
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