BHP vexes commentators

Before the announcement, most were saying that if BHP made the hard decisions and wrote down its losses in one go, then it would be a positive move for the company - a clearing of the decks. And that's exactly what the company did, only to find that the press had already decided to give it a hard time anyway.

It's time they made up their minds but in the meantime our view is for current investors to hold. In our March 24 issue we recommended buying below $14.50 but in view of the recent turmoil, we've replaced this with a hold recommendation.

Wiping the slate

BHP has cleared the slate and will try looking ahead - there's not much more they can do afterall. It has strong cashflows but is still affected by the weakness in metals prices and the fact that they haven't found a replacement for John Prescott.

BHP has reported a financial Year ending May 1998 (FY98) Net Profit After Tax (NPAT) before abnormals of $1,302 million, a decline of 6.1% on the FY97 result and a little higher than market expectations. For the second year in a row, major asset writedowns have been included as abnormals. In FY97 $976 million was written off while in FY98 $2,776 million went the same way.

The combined total of $3,752 million represents 29% of shareholders funds as at the beginning of this 2-year period. The major component of the writedowns has occurred in the Copper division where $2,167 million has been written off in the last 2 years. The book value of the North American assets, primarily the Magma acquisition, within the Copper division has fallen from $1,244 million in FY97 to $498 million in FY98.

Performance by division

BHP's Integrated Steel reported a profit of $168 million compared to $160 million in FY97. Steel Products profit was $287 million compared to $173 million in FY97. Included in the FY98 result was a profit of $49 million on the sale of BHP's 50 per cent holding in BRC Weldmesh, offset by start up losses of $77 million at Kalama, North Star, Malaysia and Thailand.

Significant cost cutting enabled unit costs to fall by about $28 per tonne year on year. It was a very poor year with a profit result for its Copper Division of $171 million compared to $542 million in FY97. Low copper prices, drought conditions in PNG affecting Ok Tedi output and negative finalisation adjustments were the primary reasons for the decline in profitability. The average price received was US$0.86 per pound compared to US$1.06 per pound in FY97.

The Petroleum Division reported a profit of $672 million, $21 million less than the FY97 result. The average oil price was $3.14 per barrel less than that received in FY97, along with lower profits from asset sales. Exploration expenditure written off was $61 million lower at $267m when compared to the FY97 figure.

The Ferrous Minerals, Coal and World Minerals divisions collectively reported a profit of $326 million compared to $425 million in FY97. Iron Ore sales were strong, aided by higher prices. Coal prices were lower, along with redundancy costs incurred at various coal mines. World Minerals performed poorly due to losses at Hartley and Beenup. And that's the divisional wrap-up over.

Cost-cutting successes

BHP has made good progress in cutting costs. $363 million were removed in FY98 and the company expects to reduce costs by a bigger amount in FY99. Steel prices, however, are expected to fall substantially in FY99 due to the economic slowdown in Asia. The company is 50 per cent hedged at an A$/US$ exchange rate of 73c in FY99, 48 per cent hedged at 70c in FY00 and 35 per cent hedged at "less than 70c" in FY01.

Asia is forecast to remain weak for 3 years, making the sale of steel, coal, iron ore and HBI challenging. As a result of asset write downs, depreciation in FY99 is estimated to be $70 million lower after tax than would otherwise be the case. Further asset sales are planned in FY99 after $3,002 million of asset sales were made in FY98.

Although the BHP share price has been hit hard of late, we still recommend investors HOLD until the appointment of the new CEO is announced. There's been much talk of a possible takeover of BHP and at these prices it's a possibility. However, with a market capitalisation of $27-28 billion it would need to be a very large predator to take on such a task. Wait until the dust settles before making a move.