BHP Billiton (BHP) Stocks Recommendation

Submitted by Craig Strzelecki on 29 January, 2007 - 08:52

BHP Billiton (BHP) have a maintained Buy/Medium Risk stocks recommendation while reducing their stock price target by $2 to $35 per share from Citigroup Investment Research (CIR). December quarter production was slightly weaker than CIR's expectations with strong results from aluminium, nickel, diamonds and manganese offset by lower petroleum and coking coal production. The capex (capital expenditure) cost for the Alumar alumina refinery expansion has increased by 40% to US$725m, in addition to start-up being delayed 6 months. Atlantis capex has also increased by 50% to US$1.5b (already allowed for). Neptune and Stybarrow are also experiencing capex pressures and we have allowed for an increase of 20%, or US$60m each. CIR have downgraded their FY07 estimate by 6% to US$13.2b, driven by 2Q production weakness and impact from provisional pricing. CIR’s estimate for the interim result on 7 February is US$6.53b with a dividend of US20¢/share. There is upside risk to the dividend if the board is prepared to signal belief in the cycle by stretching the progressive US$ dividend policy and declaring a larger increase. While CIR expect continued volatility around conflicting data and commodity price signals in the 1Q, CIR expect a recovery in 2H07 copper prices and looming 2008 production growth to ultimately drive the stock higher. Meanwhile, BHP Billiton have a Buy 2 stocks recommendation and a price target of $34 from analyst UBS. In their view: "Overall, the results were positive, with records set at a number of BHP’s facilities and first production out of Spence following its commissioning. However, it is worth noting: 1) Iron ore production is likely to be flat in 07 due to tie-in activity of RGP-3; 2) Olympic Dam continues to operate below capacity due to maintenance in the Sep qtr; 3) Capital cost pressures noted on more projects. While the production numbers were generally positive, there were several cautious statements made by BHP. Particularly, management noted that provisional pricing in copper would impact earnings by $220m for H1 FY07. While this should not come as a surprise given the downward trend in copper prices, the market may bring forecasts back ahead of the financial report on Feb 22. We think the key short-term driver is likely to be BHP's capital management policy during its interim result. We note that CVRD and Alcoa have already significantly increased their dividends due to substantial projected cash flow generation. The market is looking for a 27% increase in 07 NPAT for BHP, which could translate to a similar dividend increase assuming a constant 20% payout ratio." The analyst's valuation for BHP is $25.84 based on DCF 10% d.r. while their price target was based on 11x 08e EPS.

BHP Billiton Limited is listed on the Australian Stock Exchange (ASX) under stock code BHP. You can view their investor website here. BHP was listed on the ASX on 13 August, 1885. Charles "Chip" Goodyear is the CEO of BHP Billiton and Don Argus the Chairman. BHP Billiton was created through the Dual Listed Companies (DLC) merger of BHP Limited (now BHP Billiton Limited) and Billiton Plc (now BHP Billiton Plc), which was concluded on 29 June 2001. BHP Billiton Limited and BHP Billiton Plc continue to exist as separate companies, but operate on a combined basis as BHP Billiton. The headquarters of BHP Billiton Limited, and the global headquarters of the combined BHP Billiton Group, are located in Melbourne, Australia. BHP Billiton Plc is located in London, United Kingdom. The company is principally involved in minerals exploration, production and processing (particularly coal, iron ore, copper and manganese ore) and hydrocarbon exploration, production and refining. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade BHP. Check your charts and good luck with your share trading!

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