Search

BHP vs. FMG vs. SUL



Broken Hill Proprietary, Fortescue Metals Group and Super Retail Group. Next year sometime I will look to buy some shares (which will be one of my largest shareholdings) in one of these three companies. They are three of the largest companies by market cap on the ASX. They all offer fully-franked dividends. They all have high dividend-yields, and they all have Dividend Reinvestment Plans. In this article I will provide a detailed discussion of these three companies, and provide my thoughts on which one I suspect will offer the best buying opportunity in a year from now. By the way, at the end of the last article I decided on buying BHP over FMG, since it has a diversified resource and revenue base. What I actually did is I brought both, not separately, but through an ETF i.e. an Australian Resources Sector ETF. I could only commit a small amount of capital; but the Resources ETF provides me with diversified exposure to resources, a good yield and a dividend/distribution reinvestment plan. Anyway, back to the discussion;


First cab off the rank is BHP i.e. the largest company on the ASX. It mines iron ore, copper, nickel, coal and potash. It recently divested out of it's petroleum business by way of a merger with Woodside Petroleum, thereby creating a top-ten global petroleum business (in Woodside). I like petroleum and fossil fuels in general, but Woodside does not offer a high enough dividend yield. I do see this merger as a negative for BHP, since I believe that we are about to enter a medium-term bull market for oil prices. The funds from the sale of the petroleum businesses will be used to expand their potash business. Potash is used in the production of fertilizer. Obviously as the world's population grows, more food will need to be produced, and potash will be an important commodity for producing more food. BHP seem to be making a long-term move here, and that may prove worthwhile. In FY21 they made $61 billion in revenue. They had $108B in total assets, $55B in net assets and a market cap of $111B. They have a fully-franked trailing dividend yield of 10.67%, a PE Ratio of 12.69 and a Price to Book Ratio of 2.02. Net Operating Cash Flow was $27B, the highest it has ever been. Most of this was due to the all-time high iron ore prices that we saw in FY21, with the per-ton commodity price topping out at $215.50. BHP derived roughly 50% of its revenue from iron ore, 25% from copper, 15% from nickel and 10% from petroleum, The petroleum segment will essentially convert to potash. The thing to keep in mind is that the iron price has declined to $116 at the moment, and many commentators are predicting it to fall further, with some predicting levels around $70 a ton. There are plans to get out of coal, but for now their coal segment will be delivering significant profits. Even with the break-even cost of BHP exporting iron ore to China being below $20 USD, the all-time high coal prices of over $200, will help to offset the lower profits being made in their iron ore division.


Next up to take a look at is FMG. They used to be a minnow in Australian iron ore, but since 2003 have grown to be the third biggest producer, after BHP and Rio Tinto. They are solely engaged in mining iron ore in the Pilbara region of Western Australia. Although they do have plans to build a green hydrogen manufacturing plant in Queensland sometime in 2022. As a company they are aiming to achieve net carbon neutrality by 2030, and this will predominantly be done by shifting production into renewable green hydrogen, and using renewable transportation. The CEO of Fortescue Future Industries has said that they aim to become a leading provider of renewable energy. However, revenues will not be generated from this for a few years. At the moment, 100% of their revenues will continue to be accrued from their iron ore operations. They shifted 182.2 million tonnage of the stuff in FY21, which contributed to the company making a record net profit $10.3B USD, on the back of $22.3B in revenue. They have a net cash position of $2.7B, and paid out record dividends of $3.58 AUD to shareholders. This equates to a 24% trailing net dividend yield (at current prices) and a PE Ratio of 3.35. Their payout ratio was 80%. They have a market cap of $45.5B, with $17.7B in net assets, equating to a price to book ratio of 2.57. They have improved their mining operations efficiencies hugely and have consequently lowered their break even price on iron ore production to $14/ton. With the housing slow down in China possibly depressing the iron ore price towards $70 a ton, these efficiencies could see them survive the iron ore slowdown better than their peers. Although their (current) sole reliance on the commodity is a concern.


SUL is obviously in a different sector to BHP and FMG, but it is on my watchlist because it has a high dividend yield, full franking credits and a dividend reinvestment plan, as well as being a generally good business. SUL have a net (trailing) dividend yield of 6.8%..They are a leading retailer of auto, outdoor and leisure in Australia and NZ. They are 670 retail stores, 12,000 employees, and turnover in excess of $3.45B AUD (in the last financial year). Their main brands include Boating Camping Fishing, Macpac, Rebel Sport and Supercheap Auto. The biggest risk traditional retail face's is online retailers like Amazon and Kogan stealing market share. But Super Retail is fighting back against this, with online sales of $415 million, up 43% year-on-year., representing 12% of total sales. It is well known that young people nowadays prefer to spend on experiences rather than on goods. And SUL's portfolio of brands caters for outdoor activities. Current net inventory investment is $247 million, and they have $303 million in property/plant/equipment, with a net cash position of $242 million., bringing up a net asset position of $792 million. With a market cap of $2.88B that gives us a price to book ratio of 3.63. Keep in mind though, that retailers keep inventory levels low so that they can reduce storage costs, often it is a sign of a good retailer that turnover of product is high. That of course means that it is selling!


Compared to FMG and BHP, I expect that SUL will maintain their dividend around the level that it is currently. Since BHP and FMG are at the whim of volatile commodity prices, their dividend yield will fluctuate along with the commodity prices. As FMG is generating revenue solely from one commodity at the moment, it will be easier to track that commodity (iron ore) before buying, in order to find a good price point to pick up some shares. I do not think that BHP's move away from fossil fuels will lead to higher profits. Although, if they end up selling their coal assets, they will be doing so at very high prices. I do not believe however that there is a catalyst for any massive share price growth. This is the same for SUL. Like BHP, they will continue to do a steady as she goes business, that will pay good dividends. FMG on the other hand has a history of extreme volatility. And while this can lead towards some investors getting fearful and selling at the wrong time, it can also lead to a good buying point. Green Hydrogen is definitely an energy source of the future, it creates little emissions, and can be created from water (which is abundant). It will be used to (cheaply) power its existing iron ore operations, and any excess can be sold to other miners/businesses. With a net cash position of $2.7B, they can easily afford to build the Queensland plant. And with the 2nd richest Australian, Andrew Forrest, at the helm of (FMG subsidiary) Fortescue Future Industries, the opportunities for FMG are huge. Green Hydrogen is a growth catalyst for FMG, no doubt about it. The important thing though, is to wait for the right price point to pick up some shares. I believe that this price point will come when iron ore is hovering around $70/ton, perhaps lower.

20 views0 comments

Recent Posts

See All