‘BHP shares trad­ing closer to in­trisic value’

The Star Early Edition - - COMPANIES - Sandile Mchunu

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

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