BHP Billiton plc’s full-year results make it a “buy” for me

BHP Billiton plc (LON: BLT) roared back to form in 2017 and Harvey Jones has it on his shopping list.

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FTSE-listed mining giant BHP Billiton (LSE: BLT) has just reported its full-year results to 30 June and the market has found yet another reason to buy its shares. The stock is up more than 3% in early trading to trade 30% higher than one year ago. The £29.71bn global commodity behemoth is now high on my shopping list.

Shale and hearty

Here’s the headline figure investors are digging this morning: a 454% rise in full-year underlying profits to US$6.7bn, up from $1.2bn last year. Investors are also poring over the group’s decision to exit onshore oil & gas in the US, after bowing to pressure from activist hedge fund Elliott International to spin off the business and get out of US shale.

BHP Billiton posted a healthy 81% rise in earnings for the 2017 financial year, with underlying EBITDA of $20.3bn, up from $12.3bn last year. It was helped by higher commodity prices and operating cash cost improvements, which offset unfavourable exchange rate movements, inflation and one-off items.

Margin call

The underlying EBITDA margin is now 55%, up from 41% in 2016. Its underlying return on capital employed was 10% (after tax) in 2017, against 2.4% in 2016. The group has also delivered impressive productivity gains of $1.3bn, or a cumulative $12bn over the last five years. Management expects to deliver a further $2bn by the end of 2019.

Today’s results also showed net operating cash flow of $16.8bn and free cash flow of $12.6bn, underpinned by higher commodity prices, strong operating performance and improved capital productivity. Capital and exploration expenditure fell 32% to $5.2bn as BHP directed its efforts at more capital-efficient products, although this should increase to $6.9bn in 2018.

Let it flow

The balance sheet has also been strengthened with net debt cut from $26.1bn to $16.3bn over the year, aided by strong free cash flow generation. Outgoing chairman Jac Nasser said the group is reshaping its portfolio towards low-cost and long-life assets. “Our relentless focus on cash flow, capital discipline and value creation should allow us to significantly increase our return on capital by the 2022 financial year.”

Investors are reaping the benefits and strong cash flow helped the group fund a final dividend of 43 cents per share. BHP Billiton has paid out total dividends of $4.4bn across the 2017 financial year, including $1.1bn in additional amounts above its 50% minimum payout policy. The current yield of 1.7% is now forecast to hit 4.8%, rewarding investors who kept faith during the 2015 commodity stock collapse. Cover is set to rise to 1.6.

Dash from potash

The move to exit onshore US oil & gas is embarrassing given that the board previously stated that the division was a core part of its operations. These are an impressive set of results nonetheless but, like every miner, BHP Billiton remains at the mercy of commodity prices, which have been positive lately. Still, management deserves praise for putting the proceeds to good use and paying down net debt.

Shareholders should be delighted to see it share its good fortune. Its current valuation of 77.3 times earnings is set to tumble to just 13.6 times, making now an attractive entry point. Provided, that is, you believe that China and the global economy will keep growing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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