Another day, another set of results from the resources sector. Today I’ll be taking you on a tour of BHP Billiton‘s (LSE: BLT) (NYSE: BBY.US) interim results and setting out my rationale for steering clear despite the company being one of the most diversified in the sector, making the moves that it needs to in a difficult environment, the potential for hidden value and sticking to its progressive dividend policy.
Reducing Costs And Capital Expenditure
In light of the collapse of commodity prices over recent months, unit cash costs have been cut by 29% and capital expenditure has been reduced by 23% to US$6.4 billion in the half year to December. The total for the year to June is expected to be US$12.6 billion. It is expected that this will reduce further to US$10.8 billion in the year to June 2016. In addition to these savings, productivity gains of US$2.4 billion were realised in the period, with that figure expected to increase to US$4 billion in the year to June 2017. Despite all these initiatives, profits slipped by 31% — however, this was better than the market was expecting.
Not All Bad
Despite the 31% dip in profits, the shares have risen by over 4% today as I type. Whilst there are a lot of moving parts, I think that there could be hidden value here. The company is a global player and owns world-class assets — should we see commodity prices start to rise, I think we will see a sharp revision of the share price. The interesting thing for me here is the proposed demerger, resulting in the creation of a company named South32, named after the 32nd parallel south line of latitude that links its two regional offices, being Australia and South Africa. As the name may suggest, the new company will be responsible for the current assets in the southern hemisphere and will be headquartered in Perth, Australia. Whilst further details will be released in March, the company has promised not to rebase its dividend policy downwards, implying a higher underlying payout ratio, and South32 will adopt its own dividend policy going forward.
Why Steer Clear?
I have to say that there is a lot to like about this company. It seems to be making all of the right moves in terms of keeping costs under control and prudently reducing its capital expenditure, together with a progressive dividend policy and the possibility of hidden value within, should the demerger go ahead.
But for me, there is one overriding basic concern: commodities. This company is heavily reliant on the prevailing market prices — all of which have crashed. Whilst they could rise from here, there is nothing to say that they might go lower, dragging the share price with it. I like to sleep soundly at night, not worrying about the price of things that I cannot control. For that reason alone, I’ll sit and watch on the sidelines.