‘BHP shares trading closer to intrisic value’

BHP BILLITON’S share price was now trading closer to its intrinsic value, Electus Fund Managers equity analyst Mish-al Emeran said yesterday.

Emeran said BHP Billiton’s share price improvement over the past year could be attributed to a number of reasons.

“A few reasons, most significant of which was the increase in commodity prices (off a very low base) during the second half of 2016, especially iron ore, thermal coal and metallurgical coal on the back of higher than expected global steel demand and favourable Chinese policy adjustments,” Emeran said.

High quality Although the share price has showed an improvement, it is still way off from the highs of 2008. “At Electus we strive to buy high quality shares at prices that are low compared to their long-term valuation. We believe BHP fits the high quality criteria and our clients have benefited from the run-up in the share price,” he said.

“In our view it is now trading closer to its intrinsic value based on long-term fundamentals – where we make use of long-term sustainable commodity price expectations; as an example we believe the current spot iron ore price of around $80 (R1 073) a ton

is high relative to long-term pricing expectations (between $55 and $65) and would expect it to decrease over time as more supply enters the market. But BHP operates in a cyclical market and is exposed to the vagaries of market forces.

“Spot iron ore and coal prices are noticeably higher than consensus forecasts at the moment and if it persists for longer than expected in 2017, there is upside risk to BHP’s near-term earnings and cash flows,” he said