Question

Question 2 - You are considering investing in BHP Group Ltd (ASX: BHP). You will need to make an investment recommendation based on your market and theoretical value of BHP. This question is designed such that your answers in this question should build a company and industry profile of BHP and help make your final recommendation. Any assumptions that you rely upon should be clearly stated in your answer.

i)Undertake an industry and company analysis for BHP (see supplementary resources on Blackboard and textbook chapter listed in unit outline). This question asks you to consider the factors which influence BHP’s share price.

ii)What is the current price (any date from March 2019) of ordinary common shares of BHP Group Ltd (ASX: BHP)? Using an appropriate chart as reference, describe how this price has evolved over the past 3-years, and compare the performance of BHP to an appropriate benchmark index.

iii)What has been the main driver(s) BHP’s share price movement over the past 3 years? What do you think will impact the share price in the future? .

iv)Using an appropriate technical analysis tool introduced in lecture 4, predict what the share price of BHP will be at the end of 31st September 2019. If your prediction using technical analysis is valid, what does this mean for the concept of market efficiency?

v)What types of present valuation methods would be appropriate to value BHP given the information about the company? In your choice, provide a theoretical and applied rationale as to why you would pick this model for BHP. Hint: consider the types of valuation models you can use given the information that is available.

vi)Valuation multiples are often used to compare companies quickly. Identify at least two appropriate valuation multiples/ratios and evaluate if the company is over or under valued using relative valuation. What are the reasons you picked the multiples that you did and how did you conclude that BHP is over or under valued?

vii)What would your recommendation be with regards to buying or selling these shares right now? Justify your answer.

Answer 1

Answer 1

The factors which influence the price of a share under industry analysis are laid down below:

a) The demand and supply play a vital role to ensure a valid indication of prospects of the product relating to short term and medium term as an investor is able to evaluate the gap of supply and demand under the industry analysis as in such it is found that a particular industry may face under supply or over supply of production at different situation. When the supply is excess it actually declines the price conversely when supply is not adequate the price is realised by levying higher price of the production. This factor also relative to the perspective of BHP share price as in the mining industry often supply and demand gap occurs and accordingly an investor has to estimate such gap to choose the right time of investment.

b) Another important factor under industry analysis is to find the condition of competitiveness among the companies which are considered as the force that enables to influence the price of the share in the market. Competitive forces include barriers in taking entry in the market, bargaining capacity of the supplier and rivalry. Barriers in the new market is a constraint factor of a new firm but its entrance also influences the capacity of the industry. Although BHP possesses some preference buyers in the mining industry which is counted as a cost advantage for the company as it enables the company to sell its products at a lower cost than the new entrants which leads to bring economy of scale for this company as BHP is able to maintain higher level production capacity. For this reason this company should be a good choice for the investors to purchase its shares the situation of market indicates escalating price of share in the near future.

c) Technological renovation

    The BHP has undergone massive changes in the field of renovation of the technology and the degree of permanence is to considered as an important factor to influence the price of the shares.

d) Labour issues

In terms of labour issue when any industry suffers a problem like strike, lock out, labour grievances. These issues lag the growth of the industry. However in case of BHP there is no substantial impact of these issues which is a positive indication in respect of share price of BHP.

e) Raw material

   The availability of raw material keep the health of the industry in a good state and such rolling of raw material indicates that the industry possesses good production capacity which fulfils the needs of the customers thus influence the value of such industry. The BHP has maintained always good raw material base and contributes values to its industry.

f) Cost structure

The proportion of fixed and variable costs is maintained in appropriate manner at BHP and if we see the break even point of BHP it is pretty low thus provides better margin of safety. Such a situation is able to influence the price of a share for the investor.

The factors which influence the price of a share under company analysis are laid down below:

In order to check the price of a share of the company under company analysis it is required to scrutinize the financial statement of the company. The balance sheet and profit and loss statement are the two major contributors to know the financial position of the company. The ratio analysis is a key which enables the investors to understand the strength and weakness of the financial position of the company.

Some important ratios which are to be checked for the financial statements of BHP are:

liquidity ratios i.e. company’s ability in terms of short term strength whether BHP has the capacity to meet its financial obligation in respect of payable amount.

Leverage ratio:

This type of ratio analysis is to check the ability of the firm to meet its long term liability

Activity ratio

It is known as turn over ratios and it is used to understand the position of asset management of the company

Profitability ratio

The measurement is done to know the profit position of the company in respect of gross profit, net profit or operating profit.

Financial statement analysis is a good indicator to know the financial position of the company for the purpose of investing money into a share of that company.

Answer II)

As on march 20th 2019 the price BHP was $51.27

A chart is shown which represents the position of EPS of the company of BHP

Particulars	Amount($)	Amount($)	Amount($)
	2016	2017	2018
Order Intake	14300	18800	16500
Order book at END PERIOD	27840	32279	33871
Sales	12597	14123	14995
Total change	2.30%	8.10%	5.60%
Organic change	-1.10%	4.30%	6.40%
EBIT	985	1316	1454
In % sales	7.80%	8.90%	9.30%
Adjusted Net income	744	788	912
EPS	2.74	3.74	4.15

A benchmark index acts as a standard which enables to evaluate the share price of a firm relating to investment decision. To choose a benchmark it is necessary to check which profile provides the best risk return results. Any inappropriate bench mark profile selection leads to show a wrong message to the investor. In case of choosing small cap growth if analysis is done with the large cap value mandate it will we inappropriate to choose the right bench mark for the small cap fund. Here, in the given statement year 2016 is considered as a bench mark where the evolution of the EPS is shown.

Answer iii)

If we see the chart we can see the EPS of the company which moves upward from the 2016 to 2018 and is considered main driver of the movement of the share price.

The way the company makes the business from the last five years it is for sure that the uprising trend of EPS will be continuing for the next year also and it adds the market value of the shares and create interests among the stock holders to hold the shares to earn good amount of dividend.

answer v)

Since the growth of the company is steady for the last three years. Therefore, for the purpose share valuation if the company chooses constant growth model it would be appropriate for the company to value its share. As far as dividend is concerned the share holders received the dividend the growth of which is constant for the last three years.