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Earnings wrap: BHP and Seek

Glenn Freeman and Lex Hall  |  21 Aug 2019Text size  Decrease  Increase  |  
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A record dividend from mining major BHP (ASX: BHP) came despite missing expectations in other areas, while Seek (ASX: SEK) tripled profits and earned a Morningstar fair value upgrade.

The only way is down, as BHP pays record dividend

A record dividend payout was the standout of BHP's financial result for fiscal 2019, overshadowing its US$9.1 billion net profit after tax for the year, as handed down on Tuesday.

The mining conglomerate announced a full-year dividend of US$1.33 a share, in addition to a special dividend funded largely by the sale of its US onshore oil and gas operations.

However, Morningstar director of equity research, Mathew Hodge, lowered his fair value estimate slightly – to $30 a share from $31, on the back of rising costs and capital expenditure.

BHP's share price has dropped around 15 per cent from July 2019 highs above $42 a share, trading at $35.49 at midday Tuesday.

BHP shares remain approximately 20 per cent overvalued against Morningstar's fair value, despite the sell-off that accompanied Tuesday's result.

Though iron ore prices remain elevated, Morningstar believes these levels are unsustainable.
Prices hit a five-year high of more than US$117 a tonne in mid-July, but have since pulled back to around $94 – and Morningstar expects this to continue to fall.

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Morningstar's near-term iron ore forecasts have been lifted meaningfully on higher spot prices, stronger near-term demand from China and the potential for supply issues linked to the Vale mining disaster to persist.

Hodge flagged the potential for special dividends and buybacks from Australian-based iron ore majors in a mining sector update last month – so BHP's record dividend comes as no surprise.

"With the balance sheet in good shape and capital expenditure still relatively constrained, cash returns to shareholders remain the most likely use of free cash flow.

"But we think fiscal 2019 is likely to be the high-water mark for dividends," Hodge says, referring particularly to the boost provided by significant asset sales.

In the medium-term, he expects the high payout ratio for shareholders to continue – with a significant acquisition unlikely – but forecasts dividends to fall from US$2.35 a share in fiscal 2019 to US$1 by fiscal 2024.

Across the various BHP divisions, only petroleum beat Morningstar expectations, with other key operations – iron ore, metallurgical coal and base metals – missing expectations.

"The strong iron ore price is the dominant driver of no-moat rated BHP's share price. As with our recent review or Rio Tinto, it's the key reason we see BHP shares as overvalued," Hodge says, while noting it is less expensive than Rio.

BHP chief executive Andrew Mackenzie defended the company's production results, which fell short of investor expectations, noting that over the past five years volumes had increased by 10 per cent and unit costs cut by more than 20 per cent.

"Over the 2019 financial year, underlying improvements in our operational performance were offset by the impacts of weather, resource headwinds and unplanned outages," he said.

Morningstar's Hodge says management is confident it can more than offset headwinds in the longer-term through productivity gains, particularly around mining automation.

"We had already factored in these longer-term benefits, leaving higher costs in the near to medium term to dilute our fair value estimate," he says. "Additionally, management's guidance for slightly increased capital expenditures is another near-term valuation headwind."

Prem Icon Full analyst report: Lowering our BHP Group FVE to AUD 30 on Higher Near-Term Costs

Seek getting the job done

Online jobs site Seek has received an upgrade to its fair value estimate after tripling profits and forecasting higher earnings.

Seek (ASX: SEK), which in Australia captures 90 per cent of total time spent online searching for jobs, more than tripled its full-year profit to $180.3 million despite a 2 per cent dip in jobs ads.

The company posted a full-year net profit of $180.3 million in the year to June 30, compared with $52.2 million in the previous corresponding period, after revenue rose 18 per cent to $1.54 billion.

The dip in jobs ads comes despite the Australian Bureau of Statistics reporting 34,500 more full-time jobs were created in July.

"These results were achieved despite a backdrop of weaker macro conditions and strong competition," chief executive Andrew Bassat said as the company declared an unchanged fully franked final dividend of 22 cents.

Sales revenue from Seek's Australian and New Zealand business increased 7.0 per cent to $437.6 million although listings fell 2.0 per cent.

Despite the reported tripling in profit, Morningstar analyst Gareth James says the 245 per cent increase doesn’t reflect the underlying financial performance of the company because the previous year’s result included a $180 million impairment of its South American businesses.

Seek operates in 18 countries, including China, Brazil, Mexico, Africa and Bangladesh, and has bought minority stakes in dominant online sites within large populated and developing markets with low internet penetration.

“The 7 per cent fall in underlying NPAT to $185 million was in line with our $190 million forecast but is also a problematic metric due to the inclusion of loss-making equity accounted investments,” James said.

Seek gained 4.8 per cent to $20.03 after its results and appears fairly valued, says James, who has boosted his fair value estimate to $20.50.

James’s fair value estimate implies fiscal 2020 price/earnings of 40 and dividend yield of 1.8 per cent, or 2.5 per cent including franking credits.

“These relatively bullish metrics are justified by our forecast of a strong revenue compound annual growth rate of 11 per cent over the next decade and an accompanying earnings per share compound annual growth rate of 15 per cent,” James says.

Seek’s fiscal 2020 guidance for net profit after tax implies a 17 per cent fall in profit. However, this is no concern to management as it is prioritising investment and long-term earnings growth.

This is a sensible strategy in James’s view, particularly in the fast-moving technology sector.

“After average revenue growth of 18 per cent for the past three years, we forecast revenue growth to slow to 11 per cent on average over the next decade,” James says.

The company said it hoped to overcome "easing macro-economic conditions" both in Australia and in China - where Seek's majority-owned Zhaopin jobs portal brought in $647.9 million of sales revenue during the financial year.

Prem Icon Full analyst report: Increasing Seek FVE to AUD 20.50 on Improving Growth Outlook

are editors at Morningstar Australia.

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