BHP PLC (LON:BHP) got a double boost on Friday as two brokers upgraded their ratings for the FTSE 100-listed miner citing valuation grounds after a big coronavirus (Covid-19) related sell-off.
Germany’s Deutsche Bank upgraded its stance on BHP to ‘buy’ from ‘hold’, while cutting its target price to1,450p from 1,750p, and US bank JPMorgan raised its rating for the miner to ‘overweight’ from ‘neutral’ with a lower target price of 1,830p, down from 1,900p.
In late morning trade on Friday, BHP shares were changing hands at 1,116p each, up 3.8% on Thursday’s close.
In a note to clients, Deutsche Bank’s analysts noted that BHP has fallen by over 40% in the year-to-date on Covid-19 concerns and weaker oil prices, with the company’s enterprise value (EV) now very close to its January 2016 low.
They pointed out: “In late 2015, BHP was facing cash flow and dividend concerns and the fallout from the Samarco tailings dam collapse.
“Since then, the business has transformed. Net debt has more than halved, investment spend is under control and the asset base has been upgraded (sale of US Onshore 18 months ago). BHP has oil exposure but this amounted to only ~15% of EBITDA in FY18/19 (sub 10% in FY20/21).”
The analysts said their lower target price is based on an average of NPV and mid cycle earnings (target 6x EV/EBITDA multiple) with a 10% discount factor applied to reflect current macro risks.
They concluded: “While the outlook is very uncertain, the risk reward is sufficiently compelling in our view with ~50% upside to our non-discounted mid cycle valuation.”
Scythe taken to sector targets, estimates
Deutsche Bank’s move on BHP was also flagged in a separate note on the European metals and mining sector in which its analysts made large cuts to their 2020 growth, price and earnings estimates.
They said: “In line with the DB house view, we assume a deep global recession in H1 followed by a recovery from Q4 and 2021 (i.e. a relatively optimistic, V-shaped recovery).
“In Q2, we now anticipate steeper demand contractions than those seen in H2'08 and our Q2 average price estimates are ~10% below current levels.”
The analysts noted that they have reduced their 2020 underlying earnings (EBITDA) estimates by on average up to 20% and target prices by 12%-35%.
Among other UK blue chips, Deutsche Bank’s target for Anglo American PLC (LON:AAL) was cut to 2,150p from 2,500p, with a ‘buy’ rating maintained; Antofagasta PLC’s (LON:ANTO) target was reduced to 760p from 850p and a ‘hold’ rating reiterated; Glencore PLC (LON:GLEN) saw its target cut to 220p from 275p, with a ‘buy’ stance maintained; and Rio Tinto plc’s (LON:RIO) target was lowered to 3,900p from 4,440p, with a ‘hold’ rating reiterated.