Summary
- BHP Group Limited's dividend per share tumbled to $0.90 amidst a significant drop in adjusted net income.
- BHP's stock rebounds over 50% from November lows, suggesting brighter prospects in 2023 as investors remain hopeful.
- BHP's operating performance in CY23 could face the heat as the Fed gears up to be even more hawkish.
- BHP's valuation has normalized after an impressive rebound, and the less enticing reward/risk profile poses a new challenge.
The world's leading resources company, BHP Group Limited (BHP), reported its H1FY23 earnings release earlier today (February 21) with a revenue beat, but its adjusted EBITDA came in below consensus estimates.
BHP reported an H1 adjusted EBITDA of $13.23B (vs. consensus: $14.04B), which fell 28.3% YoY, impacted by the COVID lockdowns in China and the economic slowdown globally.
However, since the reporting period for BHP's H1FY23 covers its performance from July to December 2022, we believe the market had already reflected these challenges at BHP stock's early November 2022 lows.
Accordingly, BHP has recovered more than 50% (in price-performance terms) through its February highs as investors looked past its H1FY23 performance.
Keen investors regularly assess BHP's outlook, given its exposure to the global economy through its commodities and metals business. BHP's portfolio is primarily focused on iron ore. However, it has significant interests in copper, nickel, potash, and metallurgical coal, which are critical to driving the global economic engine.
As such, parsing BHP's global outlook is akin to taking a closer look into how the global economy could progress, even as strategists/ economists remain worried.
BHP CEO Mike Henry reminded investors that the company is more optimistic about CY2023, even though costs remain higher than in pre-pandemic days, particularly in energy and employment.
However, the company highlighted that the worst of China's economic headwinds is likely behind us, which augurs well for the global economy. Notably, Henry's outlook of a more robust H2CY23 recovery is consistent with the investors' expectations on China as it ramps up its industrial and consumption engine in H1.
Moreover, the company is confident that the secular outlook driving long-term demand for its commodities is still valid, bolstered by the energy transition opportunities.
Despite that, near-term headwinds over the global economy ex-China shouldn't be understated, which was also pointed out by Henry. With market operators pricing in a more hawkish Fed , given higher-than-expected inflation metrics, it could slow down the economy further.
In addition, the risks of a deeper recession or hard landing are not remote, as the Fed could be compelled to drive rates higher and keep them there longer to tame persistent inflation.
Given BHP's global exposure, investors need to pay close attention to the Fed's balancing act as it tries to avoid a hard landing. However, it's still too early to be sure that the Fed is on track. Despite that, China's policymakers are highly committed to recovering its growth engine, mitigating the risks of a steeper downturn in the U.S. and Europe.
BHP price chart (weekly) (TradingView)
Despite these headwinds, bottom fishers in November 2022 seemed to have "ignored" the potential risks of a likely dividend cut, given the expected fall in adjusted net income.
Accordingly, BHP revised its dividend per share to $0.90, down from $1.50 in the previous year. However, BHP's valuation was too attractive in November, as it fell below the two standard deviation zone under its 10Y EBITDA multiple averages.
With the recovery from its lows, BHP last traded at an NTM EBITDA of 5.7x, near its 10Y average of 6.1x. Hence, its valuation has normalized.
We also gleaned that BHP's price action is no longer attractive, as it inched closer to the critical resistance zone that rejected upward momentum since 2021.
As such, we believe the reward/risk balance for BHP Group Limited is tilted toward a further pullback before further advances can be made.
With that in mind, we move to the sidelines from here.
Rating: Hold (Revised from Buy).
For further details see:
BHP Group: China's Recovery Faces A Hawkish Fed (Rating Downgrade)