I’m working my way through the latest annual reports of your favourite FTSE 100 companies, looking for insights into their businesses. Today, it’s the turn of mining giant BHP Billiton (LSE: BLT) (NYSE: BBL.US).
A focus on high margins
BHP Billiton is a ‘diversified miner’. The table below shows the company’s different businesses, the contribution each makes to total group revenue, and the EBITDA (earnings before interest, tax, depreciation and amortisation) margins for each division.
| Iron Ore | Potash and Petroleum | Copper | Coal | Aluminium, Manganese & Nickel | |
|---|---|---|---|---|---|
| Contribution to total revenue | 31% | 20% | 18% | 16% | 14% |
| EBITDA margin | 60% | 67% | 38% | 16% | 10% |
I was encouraged to learn that while BHP Billiton is diversified, the two largest divisions — accounting for over half of group revenues — have by far the strongest margins.
Furthermore, the company has said it is actively managing its portfolio to increase the focus on the first four businesses, which means the low-margin aluminium, manganese and nickel division will become increasingly less significant.
It’s not all about China
In the current environment of falling revenues and profits in the mining sector, much has been made of a slowdown in demand from resource-hungry China. I was interested to learn how important China is to BHP Billiton, and the extent to which the slowdown there has hurt the company’s top line.
The table below shows the year-on-year change in BHP Billiton’s revenue by geographical location of customer. The company has 10 reporting regions, and the table shows the five that had the biggest negative impact.
| Region | 2012/13 revenue ($bn) | 2011/12 revenue ($bn) | Change ($bn) | Change % |
|---|---|---|---|---|
| China | 19.4 | 21.6 | -2.3 | -10.4 |
| Rest of Asia | 13.6 | 15.0 | -1.4 | -9.3 |
| Japan | 7.8 | 8.9 | -1.1 | -12.7 |
| Europe (ex-UK) | 6.3 | 7.4 | -1.1 | -14.9 |
| Australia | 4.6 | 5.3 | -0.7 | -13.8 |
China is BHP Billiton’s largest customer, accounting for around 30% of total group revenue. With a $2.3bn year-on-year drop in sales, China was also the biggest single contributor to a total group revenue fall of $6.3bn.
However, while the China slowdown was significant for BHP Billiton, it wasn’t the be-all and end-all. The developed-world regions of Japan, Europe (ex-UK) and Australia saw larger sales contractions in percentage terms, and together contributed $2.9bn to the total revenue decline.
Controlling costs
Like all miners, BHP Billiton has been banging on about driving down costs. Therefore, I was surprised to discover that the number of employees and the cost of employing them have been rising, as the table below shows.
| Year | Average number of employees | Total cost ($bn) | Increase | Average cost per head ($’000) | Increase |
|---|---|---|---|---|---|
| 2012/13 | 49,496 | 7.4 | 4.5% | 150 | 4.2% |
| 2011/12 | 46,370 | 6.7 | 10.5% | 144 | 12.7% |
| 2010/11 | 40,757 | 5.3 | — | 130 | — |
During a two-year period when bottom-line profit has plunged from $24bn to $11bn, employee costs have risen by over £2bn. However, I see that the rise has slowed for the latest year, suggesting management is getting to grips with the situation.
Overall, the things I’ve learned from BHP Billiton’s annual report are positive; and support my view that the company is reasonable value on 11.7 times forecast earnings with a 4.3% dividend yield at a recent share price of 1,861p.