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1.Company Profile:
a.BHP Billiton:
BHP Billiton is the global in the leader of the resources industry. “Formed from the merger between Billiton and BHP, which has brought together an exceptional mix of the quality, low-cost resource and assets, complemented by the strong management team determined to our assets in the efficient manner. BHP Billiton is created through a Dual Listed Companies (DLC) merger of BHP Limited (now BHP Billiton Limited) and Billiton Plc (now BHP Billiton Plc), which was then concluded on the 29 June 2001. BHP Billiton Limited and BHP Billiton Plc exist as two separate companies, but operate on the combined basis of BHP Billiton. The headquarters of the BHP Billiton Limited is located in the global headquarters of the combined BHP Billiton Group which are located in Melbourne, Australia. BHP Billiton Plc is located in the London, United Kingdom. Both companies have had identical boards of directors and are then run by a unified management team”. Shareholders in each company have the equivalent economic and voting rights in to the BHP Billiton Group as a whole.
BHP Billiton = BHP + Billiton
BHP Background:
BHP has rich and varied history which began in silver, zinc and lead mine in the Broken Hill near New South Wales, Australia. “It is one of the Australia’s oldest and the most largest companies, it was then renowned for continuously developing a new operations which has both domestically and internationally. It also recognised as one of the Australia’s great companies”. BHP was then listed on the stock exchanges in Australia, New Zealand, Switzerland the UK Germany and US.
Billiton Background:
Billiton has its roots which go back as far as 1860. Prior to its merger with the natural resources company BHP. “Billiton was a one of the global leader in metals and mining sector, and also one of the major producers of alumina and aluminium, chrome, steaming coal, nickel and titanium minerals and manganese ores and alloys. Billiton also developed a growing copper and substantial portfolio. During the 1990s and beyond, Billiton experienced a considerable growth in all field”. The portfolio included are the aluminium smelters in Mozambique and South Africa, nickel operations in Colombia and Australia, base metals mines in South Africa, South America, Canada. Coal mines in Australia, South Africa and Colombia as well as the operations in Brazil, and South Africa Suriname, Australia (aluminium)
b.Rio Tinto Limited:
Rio Tinto is one of the leading international mining group in the world, it is combination of Rio Tinto plc, a London listed public company which has headquartered in UK, and Rio Tinto Limited, which is on the Australian Stock Exchange list, with executive offices in the Melbourne region. The two companies are joined together in dual listed companies (DLC) structure as one single economic entity, know as Rio Tinto Group. Rio Tinto is the combination of the two companies. Rio Tinto plc, based in UK, and Rio Tinto Limited, based in Australia.
c.Alcoa Inc.:
Alcoa is one of the world leaders in production and management of fabricated aluminium, alumina combined, and primary aluminium through its growing participation in the industry. Alcoa changed the corporate name of the company in January 1999 from Aluminium Company of America to Alcoa Inc. This is to reflect the global scope of Alcoa and its diverse workforce.
d.Amcor:
Amcor is one of the global leaders in global packaging solutions who supplys a broad range of plastic, fibre, metal and glass packaging products. Amcor Limited’s group of companies comprise of six Business Groups..
2.BHP Billiton performance:
From the above fig, it is clearly shown that the BHP Billiton performance is higher than the it sector (Basic material) and relatively less when compared with the Market performance. This is good sign that the firm is performing well in the sector.
3.Porter’s 5 forces model:
5 Forces is introduced by Michael Porter, a Harvard graduate. “The intensity of industry competition and an industry’s profit potential are functions of five forces of competition” (Hitt, et al., 2007, p.51).
Source: www.soopertutorials.com
According to Porter, one of the competitive nature of a firm composite of five forces:
- Rivalry among competing firms
- Potential entry of new competitors
- Potential development of substitute products
- Bargaining power of suppliers
- Bargaining power of Buyer
1. Rivalry among competing firms:
This is one of the most powerful among the 5 other competitive forces. The competition is more intense when the firm gives up the competitive advantage over the strategies pursued by their rivals (Hitt, et al., 2007). This can be further classified in to:
- Numerous or Equally Balanced competitors
- Slow Industry Growth
- High Fixed costs or High storage costs
- Lack of differentiation or Low Switching costs
- High Strategic Stakes
- High Exit Barriers
The main competitor for BHP Billiton is Rio Tinto. Between BHP Billiton and Rio Tinto always prevails a stiff competition.
2. Potential entry of new competitors:
- Barriers to Entry
- Economies of sale
- Product Differentiation
- Capital requirements
- Switching costs
- Access to distribution channels
- Cost Disadvantages independent of scale
- Government policy
ii. Expected retaliation
In this case of BHP Billiton, which is a well established firm, the threat of new entrants is very minimal.
3. Potential development of substitute product:
4. Bargaining power of suppliers:
The Supplier power increases when the suppliers in big and very few in numbers. When there are no suitable substitute products in order to replace and when the suppliers products incur a very high switching cost (Hitt, et al., 2007).
5. Bargaining power of Buyers:
The Bargaining power of the buyers increases if the buyers are big and very few in numbers. This will also increases when the buyers purchase very big portion of industry’s total output and the buyers switching cost is very low (Hitt, et al., 2007).
4.Industry Analysis:
4.1. Liquidity Ratio:
a.Current Ratio:
|
Current Ratio |
= |
Current Assets |
|
Current Liabilities |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
0.89 |
1.09 |
0.95 |
1.13 |
1.32 |
1.02 |
0.99 |
1.08 |
1.32 |
1.90 |
|
RIO |
0.67 |
0.79 |
0.82 |
0.94 |
1.24 |
1.56 |
1.19 |
1.11 |
0.83 |
1.82 |
|
AAI |
0.95 |
1.36 |
1.42 |
1.33 |
1.19 |
1.19 |
1.26 |
1.13 |
1.12 |
1.30 |
|
AMC |
1.26 |
1.29 |
2.16 |
0.98 |
1.03 |
1.08 |
0.89 |
0.96 |
0.95 |
0.79 |
The current ratio for BHP is higher than the other firms in its industry. It shows the liquidity strength of BHP as it can pay for its short term obligations without fail. And also the performance of BHP over the past 10 years is improving whereas for AMC, one of its top competitors, the value keeps on decreasing.
b.Quick Ratio:
|
Quick Ratio |
= |
Current Assets – Inventory |
|
Current Liabilities |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
0.13 |
0.36 |
0.41 |
0.52 |
0.51 |
0.27 |
0.18 |
0.27 |
0.30 |
0.98 |
|
RIO |
0.34 |
0.41 |
0.48 |
0.44 |
0.60 |
1.02 |
0.61 |
0.40 |
0.29 |
0.82 |
|
AAI |
0.53 |
0.67 |
0.65 |
0.68 |
0.55 |
0.56 |
0.54 |
0.49 |
0.46 |
0.68 |
|
AMC |
0.73 |
0.78 |
1.69 |
0.52 |
0.52 |
0.57 |
0.49 |
0.61 |
0.53 |
0.43 |
The quick ratio of BHP is greater than that of the competitors in the market. The company has enough cash reserves to pay of its short term obligations without selling the inventories. This shows the strong financial management in the company.
4.2. Profit Ratio:
The most commonly used profit ratios are gross profit margin, net profit margin, return on total assets, and return on stockholders’ equity.
a.Gross profit margin:
|
Gross Profit Margin |
= |
Sales Revenue – Cost of Goods Sold |
|
Sales Revenue |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
0.25 |
0.29 |
0.29 |
0.30 |
0.30 |
0.33 |
0.50 |
0.53 |
0.47 |
0.44 |
|
RIO |
0.47 |
0.49 |
0.41 |
0.45 |
0.40 |
0.45 |
0.50 |
0.43 |
0.39 |
0.31 |
|
AAI |
0.19 |
0.11 |
0.13 |
0.09 |
0.08 |
0.08 |
0.12 |
0.15 |
0.08 |
-0.04 |
|
AMC |
0.11 |
0.13 |
0.11 |
0.12 |
0.12 |
0.11 |
0.11 |
0.08 |
0.11 |
0.11 |
The gross profit margin for BHP decreased in 2009 due to decrease in overall revenue of the company. But when compared with other firms in the industry,the gross profit margin is higher than the other competitors. This shows that the company is stockholders friendly as it maximizes wealth to them.
b.Net profit margin:
|
Net Profit Margin |
= |
Net Income |
|
Sales Revenue |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
0.08 |
0.12 |
0.11 |
0.12 |
0.15 |
0.19 |
0.31 |
0.34 |
0.26 |
0.23 |
|
RIO |
0.21 |
0.23 |
0.17 |
0.15 |
0.19 |
0.27 |
0.34 |
0.26 |
0.20 |
0.15 |
|
AAI |
0.08 |
0.06 |
0.04 |
0.05 |
0.05 |
0.06 |
0.09 |
0.09 |
0.04 |
-0.05 |
|
AMC |
0.04 |
0.04 |
0.04 |
0.04 |
0.04 |
0.04 |
0.04 |
0.04 |
0.04 |
0.04 |
The net profit margin has decreased in 2009 because of decline in gross profit margin. The competitors have even negative profit which shows that BHP is performing well ahead than the Industry.
c.Return on Equity:
|
Return on Stockholders’ Equity |
= |
Net Income Available to |
|
Stockholders’ Equity |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
– |
0.24 |
0.14 |
0.14 |
0.24 |
0.35 |
0.48 |
0.48 |
0.44 |
0.32 |
|
RIO |
– |
0.23 |
0.18 |
0.13 |
0.17 |
0.37 |
0.43 |
0.33 |
0.52 |
0.18 |
|
AAI |
– |
0.12 |
0.06 |
0.08 |
0.11 |
0.12 |
0.14 |
0.17 |
0.06 |
-0.06 |
|
AMC |
– |
0.11 |
0.09 |
0.10 |
0.10 |
0.10 |
0.11 |
0.11 |
0.11 |
0.12 |
The return on equity has decreased in the past 2 years because of global financial crisis, otherwise the ROE keeps on improving from 2001 to 2007. The competitors of BHP faced greater decline in ROE in 2009 when compared with previous years. This shows that BHP performed well in global down turn and is not that much affected in materials industry.
4.3. Activity Ratio:
a.Inventory turnover:
|
Inventory Turnover |
= |
Cost of Goods Sold |
|
Inventory |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
– |
9.12 |
7.18 |
7.42 |
10.44 |
9.99 |
6.49 |
5.90 |
7.40 |
6.37 |
|
RIO |
– |
2.91 |
3.37 |
2.74 |
3.51 |
5.41 |
4.83 |
4.19 |
7.12 |
4.99 |
|
AAI |
– |
8.08 |
6.77 |
6.93 |
10.13 |
8.84 |
6.03 |
7.31 |
7.07 |
7.42 |
|
AMC |
– |
8.08 |
6.77 |
6.93 |
10.13 |
8.84 |
6.03 |
7.31 |
7.07 |
7.42 |
The inventory turnover of BHP has decreased from previous years and is slightly equal to the industrial average of Inventory turnover. The turnover of RIO is better than that of BHP as it takes less time to convert the inventory to sales.
b.Days Sales Outstanding (DSO):
Days sales outstanding (DSO), or average collection period.
|
DSO |
= |
Accounts Receivable |
|
Total Sales/360 |
||
Accounts receivable is divided by average daily sales. The use of 360 is standard number of days for most financial analysis.
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
2.89 |
11.66 |
18.80 |
19.59 |
11.63 |
6.71 |
8.74 |
7.25 |
4.30 |
5.39 |
|
RIO |
68.90 |
78.96 |
90.35 |
58.08 |
51.82 |
46.27 |
44.05 |
73.97 |
32.91 |
37.73 |
|
AAI |
59.48 |
45.12 |
45.25 |
47.38 |
35.25 |
45.29 |
40.57 |
33.72 |
34.72 |
42.24 |
|
AMC |
40.18 |
80.26 |
53.43 |
46.01 |
48.50 |
49.53 |
52.23 |
72.49 |
45.66 |
40.83 |
The number of days BHP takes to convert the sale into cash is very low when compared with other firms in the industry. This shows that the firm has better management and good customers and greater the days leads to bankruptcy and the firm cannot meet its short term requirements.
4.4. Leverage Ratio:
a.Debt-to-assets ratio:
|
Debt-to-Assets Ratio |
= |
Total Debt |
|
|
Total Assets |
|||
BHP uses lesser debt for financing investments nowadays and has decreased when compared with initial timings. Financing for assets increase long term liabilities and decreases profit and in turn minimises shareholder wealth. By having lower debt-asset ratio BHP decreases the riskiness involved in the project.
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
0.29 |
0.31 |
0.27 |
0.25 |
0.21 |
0.26 |
0.19 |
0.18 |
0.17 |
0.21 |
|
RIO |
0.30 |
0.33 |
0.30 |
0.25 |
0.16 |
0.13 |
0.10 |
0.46 |
0.44 |
0.24 |
|
AAI |
0.15 |
0.04 |
0.03 |
0.07 |
0.09 |
0.06 |
0.06 |
0.08 |
0.10 |
0.06 |
|
AMC |
0.33 |
0.36 |
0.23 |
0.26 |
0.28 |
0.28 |
0.32 |
0.33 |
0.31 |
0.34 |
b.Debt-to-equity ratio:
|
Debt-to-Equity Ratio |
= |
Total Debt |
|
Total Equity |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
0.76 |
0.68 |
0.62 |
0.57 |
0.43 |
0.61 |
0.37 |
0.36 |
0.33 |
0.40 |
|
RIO |
0.71 |
0.80 |
0.74 |
0.55 |
0.31 |
0.25 |
0.18 |
1.78 |
1.77 |
0.50 |
|
AAI |
0.37 |
0.09 |
0.08 |
0.17 |
0.20 |
0.15 |
0.13 |
0.17 |
0.26 |
0.14 |
|
AMC |
0.89 |
0.97 |
0.45 |
0.53 |
0.60 |
0.64 |
0.91 |
0.84 |
0.84 |
0.92 |
BHP uses debt lesser than that of greater competitors like RIO and AMC.AAI and others are smaller companies when compared with BHP. To maximize shareholders wealth, BHP needed greater return as it uses more equity for its investment activities.
4.5. Shareholder-Return Ratios:
a.Price-earnings ratio:
The price-earnings ratio measures the amount investors are willing to pay per dollar of profit. It is defined as follows:
|
Price-Earnings Ratio |
= |
Market Price per Share |
||||||||||||
|
Earnings per Share |
||||||||||||||
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
||||
|
Company |
||||||||||||||
|
BHP |
0.00 |
0.11 |
0.18 |
0.22 |
0.17 |
0.15 |
0.12 |
0.13 |
0.13 |
0.14 |
||||
|
RIO |
0.00 |
0.11 |
0.13 |
0.19 |
0.15 |
0.08 |
0.09 |
0.12 |
0.08 |
0.13 |
||||
|
AAI |
0.00 |
0.25 |
0.50 |
0.45 |
0.24 |
0.15 |
0.13 |
0.13 |
0.43 |
-0.42 |
||||
|
AMC |
0.00 |
0.16 |
0.20 |
0.17 |
0.15 |
0.15 |
0.14 |
0.15 |
0.13 |
0.12 |
||||
The price earnings ratio for BHP is higher than that of the industry competitors. The earnings ratio is increased even in the recession timing. The investors of BHP are ready to pay higher prices which shows greater demand for the company share.
b.Price-sales ratio:
The price-sales ratio is defined as follows:
|
Price-Sales Ratio |
= |
Market Price per Share |
||||||||||||
|
Revenue per Share |
||||||||||||||
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
||||
|
Company |
||||||||||||||
|
BHP |
0.00 |
1.57 |
2.16 |
2.65 |
2.51 |
2.86 |
3.75 |
4.40 |
3.34 |
3.18 |
||||
|
RIO |
0.00 |
2.32 |
2.44 |
3.29 |
2.90 |
1.91 |
2.78 |
2.91 |
1.43 |
2.01 |
||||
|
AAI |
0.00 |
1.35 |
1.58 |
1.86 |
1.02 |
0.72 |
0.97 |
1.15 |
1.39 |
2.09 |
||||
|
AMC |
0.00 |
0.65 |
0.66 |
0.61 |
0.57 |
0.51 |
0.52 |
0.61 |
0.53 |
0.44 |
||||
The price sales ratio for BHP is higher than the industry. It shows that the company is spending more money to sell a unit of product than the others in the industry. The profit will become lesser if the selling price of the product increases. The industry is doing better than the company (BHP)
c.Price-to-cash flow ratio:
The price-to-cash flow ratio is defined as follows:
|
Price-to-cash flow Ratio |
= |
Market Price per Share |
|
Cash flow per Share |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
– |
7.38 |
3.35 |
3.52 |
3.95 |
4.00 |
6.32 |
6.13 |
4.84 |
6.77 |
|
RIO |
– |
13.53 |
5.46 |
9.34 |
6.90 |
3.01 |
3.16 |
-4.15 |
3.66 |
-10.23 |
|
AAI |
– |
1.57 |
1.42 |
1.86 |
1.14 |
0.99 |
0.87 |
1.24 |
1.25 |
3.04 |
|
AMC |
– |
1.52 |
2.67 |
0.58 |
0.75 |
0.64 |
0.60 |
0.85 |
0.64 |
0.55 |
The price to cash flow ratio has increased for BHP which is higher than that of the industry. The lower the cash flow ratio better the stock value is. In this case the stock value of the industry is better than BHP.
d.Price-Earnings growth ratio:
The price-earnings growth ratio is defined as follows:
|
Price-Sales Ratio |
= |
Price earnings ratio |
|
EPS growth |
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
Company |
||||||||||
|
BHP |
– |
-0.41 |
-0.56 |
-1.19 |
0.23 |
0.23 |
0.16 |
0.58 |
3.42 |
-1.06 |
|
RIO |
– |
0.49 |
-1.10 |
-0.56 |
0.32 |
0.05 |
0.21 |
-2.51 |
0.10 |
-0.20 |
|
AAI |
– |
-1.89 |
-0.94 |
8.91 |
0.64 |
0.43 |
0.54 |
1.58 |
-0.62 |
0.21 |
|
AMC |
– |
-1.20 |
10.45 |
0.94 |
-17.13 |
-21.71 |
3.48 |
-3.69 |
-3.48 |
49.88 |
BHP has negative value which shows that the stock is undervalued. The higher ratio of the industry shows that the stock is worse when compared with BHP.
e.Free cash flow to equity:
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
|
BHP |
15383000000 |
7470881771 |
18117758411 |
17556633347 |
20386167608 |
|
RIO |
4605000000 |
2699000000 |
6959000000 |
3831666668 |
5730575517 |
|
AAI |
34958483754 |
38531252962 |
39859688830 |
28691248323 |
34769594180 |
|
AMC |
4292700000 |
2413500000 |
1853100000 |
11172800000 |
7806000000 |
|
Year |
2005 |
2006 |
2007 |
2008 |
2009 |
|
BHP |
29057859498 |
25646583705 |
33398925378 |
42622706028 |
29099377349 |
|
RIO |
17815805288 |
25018555942 |
-23603566336 |
30531974196 |
-9150036810 |
|
AAI |
35114187935 |
42495232655 |
32366290635 |
29924907442 |
14120382094 |
|
AMC |
8943000000 |
9640500000 |
7098900000 |
7682700000 |
7554400000 |
f.Free cash flow of firm:
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
|
BHP |
5723320000 |
-3870596061 |
9842687590 |
9816267748 |
5151677841 |
|
RIO |
6167080000 |
5178480000 |
6494080000 |
3791720000 |
1592564425 |
|
AAI |
7791407942 |
655968982 |
8173712144 |
5374661656 |
2521752956 |
|
AMC |
729180000 |
-267020000 |
-3039616000 |
3623380000 |
912460000 |
|
Year |
2005 |
2006 |
2007 |
2008 |
2009 |
|
BHP |
14378535156 |
13033372350 |
20725283336 |
18368311680 |
9133885607 |
|
RIO |
4555562681 |
12999751443 |
7217077947 |
35226431471 |
-19387209293 |
|
AAI |
-5564916179 |
11405784910 |
6538795173 |
8799507442 |
-4804403277 |
|
AMC |
1303676000 |
2635956000 |
534764000 |
1575300000 |
1463088000 |
Beta of the firm:
|
Company |
Beta |
|
BHP |
0.948292094 |
|
RIO |
1.181363075 |
|
AAI |
0.038845873 |
|
AMC |
0.008915171 |
The beta of the firm is calculated and the BHP is less riskier than its top competitor RIO.
Calculation of k:
|
Beta |
0.95 |
|
Rf |
4.9% |
|
Rm |
12.2% |
|
Risk premium |
7.3% |
K = Rf + b * Risk premium
= 4.9+0.95*7.3
=11.84%
Calculation of g:
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
BHP |
||||||||||
|
Growth rate |
– |
0.34 |
0.20 |
0.20 |
0.35 |
0.45 |
0.58 |
0.56 |
0.53 |
0.45 |
Average growth rate = 41%
Calculation of Dividend growth model:
|
Year |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
BHP |
||||||||||
|
Dividend paid |
0.232 |
0.239 |
0.238 |
0.232 |
0.245 |
0.363 |
0.479 |
0.594 |
0.788 |
1.136 |
|
Dividend growth |
_ |
0.033 |
-0.007 |
-0.022 |
0.054 |
0.479 |
0.319 |
0.239 |
0.326 |
0.441 |
Dividend growth = (P1- P0)/ P0
Average dividend growth = 20.7%
Calculation of forecast Dividend growth
Here K < g,
|
Given |
Growth rate |
0.207 |
||
|
2009 |
year |
2010 |
2011 |
2012 |
|
1.13 |
Forecasted dividends |
1.36391 |
1.646239 |
1.987011 |
Calculation of Discounted cash flow:
|
Discounted cash flows |
||||||
|
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
Terminal value |
|
1.217777 |
1.312372 |
1.414315 |
1.32592 |
1.24305 |
1.16536 |
-5.666059486 |
Intrinsic value = 2.01
Decision as per DDM = overvalued, sell.
Prabhakaran Damodaran-15836738