Bhp Tells Brokers Their Forecasts Too High

Sydney Morning Herald

Thursday March 11, 1999

By KATE ASKEW Resources Writer

BHP has warned stockbroking analysts they should drastically reduce their full-year earnings forecasts to around $500 million, leaving its shares vulnerable.

Some analysts will be forced to wipe as much as 25 per cent from their BHP earnings forecasts for the year to the end of May, given an IBES survey of analysts recently pointed to a consensus of $750 million.

The company reported a first-half profit of $453 million before abnormals.

The alerts in recent days follow two formal warnings to the Australian Stock Exchange in the past six months regarding the second-quarter result.

ABN Amro BHP analyst Mr Andrew Hines, whose expectations were at the low end, downgraded his pre-abnormal profit forecast for the full year by 13 per cent from $584 million to $504 million on Friday, citing lower than expected coal earnings and commodity prices.

He noted BHP managing director Mr Paul Anderson's recent comment: "Amongst our constituents I don't think there is a full appreciation for the depth and duration of the current down cycle in commodity prices."

Credit Suisse First Boston director resources Mr Peter O'Connor is also expected to downgrade his forecasts today, from $718 million for the full year.

The warning also raises expectations BHP's third-quarter result - due out next Friday - could come in at a loss on an operating basis. "It is not inconceivable that BHP reports a loss in an upcoming quarter," ABN Amro's Mr Hines said.

Ord Minnett's BHP analyst Mr Paul McTaggart downgraded his 1998-99 pre-abnormal earnings from $792 million to $643 million on Monday.

Mr McTaggart said earnings were at risk from possible lower iron ore volumes, falling oil prices and lower domestic steel volumes which have been hit by lower-priced imported steel and aggressive competition from Smorgons.

BHP shares yesterday defied the profit downgrades, gaining 25c to $12.34.

More than 5.4 million shares worth $66 million changed hands. The stock has gained 5.5 per cent since Friday. It has a year high/low range of $16.10/$10.62.

At yesterday's share price, BHP is trading at a price to earnings multiple of 42.8 times forecast 1999 earnings of $500 million.

Using an earnings target of $550 million, the multiple drops to 38.9 times. Based on these numbers, BHP is trading at a massive premium to the market.

It compares to the All Ordinaries index which trades at a price-to-earnings multiple of 20.3 times 1999 earnings and the All Resources at 20.5 times earnings.