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How Are BHP’s Margins Expected to Progress Going Forward?

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Cost cutting and focus on returns

BHP Billiton (BHP) has vowed to focus on reducing costs by another 10% in its Australian operations. It has a target of 2.2 billion Australian dollars (~$1.6 billion USD) in productivity gains over the next two years. 

The company also plans to improve its returns by driving performance. It’s targeting a return on capital employed of ~30% by fiscal 2022.

The company is expecting its oil production to decline in fiscal 2018 (which ends on June 30, 2018) compared to fiscal 2017. It expects its coal production to remain mostly flat, and it expects its iron ore and copper production to increase year-over-year (or YoY) in fiscal 2018.

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Revenue estimates

According to analysts, BHP is expected to generate revenue of $42.0 billion in fiscal 2018, implying a rise of 9.8% YoY. In comparison, BHP’s actual revenue rose 24% YoY in fiscal 2017. 

As we discussed earlier, while there will likely be a small rise in the company’s production, most of its revenue growth is expected to come from rising commodity prices. Analysts expect revenue growth of 3.3% and 2.5%, respectively, in fiscal 2019 and fiscal 2020.

EBITDA estimates

While the expected rise in BHP’s fiscal 2018 revenue is 9.8%, the company’s expected EBITDA (earnings before interest, tax, depreciation, and amortization) growth is 13.4%. The higher increase in BHP’s EBITDA is expected to come from BHP’s cost-cutting initiatives, and it implies an EBITDA margin of 54.8%. This margin is higher than BHP’s margin of 52.6% in fiscal 2017. In fiscal 2019, however, the company’s EBITDA is expected to fall 6.7% YoY to $21.5 billion, probably due to higher expected costs by analysts in fiscal 2019.

Mining giants (GNR) Southern Copper (SCCO), Glencore International (GLNCY), Teck Resources (TCK), and Freeport-McMoRan (FCX) have seen their estimates revised slightly upward due to recent strength in commodity prices.

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