BHP Group Ltd (ASX: BHP) shares are under the spotlight as investors focus on the imminent demerger of its petroleum business to Woodside Energy Group Ltd (ASX: WDS).
A couple of weeks ago, Woodside shareholders approved the merger of BHP's oil and gas portfolio with Woodside through an all-share merger. The merger is scheduled for 1 June 2022. BHP is expecting to receive 914,768,948 Woodside shares.
But this demerger has been in the works for a number of months. Now there is talk of another BHP demerger.
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BHP to demerge again?
According to reporting by The Australian, Paul McTaggart from the broker Citi has suggested there could be benefits to BHP splitting off its iron ore and coal business from the other commodities.
One of the main reasons for this suggestion is that iron ore and metallurgical coal are now mature businesses that may not have much growth ahead of them. It's thought demand in China may be peaking because of the effects of 'peak' demographics as well as the steel industry being urged to decarbonise.
It's speculated BHP's 'bulks' business of iron ore and coal could see earnings before interest, tax, depreciation and amortisation (EBITDA) decline from US$29 billion to US$13 billion in FY30. The suggestion was iron ore and coal prices could return to average long-term levels. This could put BHP's market capitalisation at around $156 billion based on a discounted cash flow valuation and the potential dividend yield.
What would remain?
The BHP 'metals' business – which would include potash, copper, and so on – could generate "stable" EBITDA of approximately $12 billion. It's thought BHP's Jansen potash business could offset a grade/quality decline over time of the output from the company's joint venture Escondida mine in Chile.
McTaggart said (as reported by The Australian):
BHP's metals business – including Jansen – has growth options but we fear these are lost within the broader BHP group.
We see the potential for [BHP] Metals to get a market re-rate given growth options are more meaningful within a smaller $68 billion market cap entity, potentially worth $2 a share.
We believe that mergers and acquisitions are not likely in either iron ore or coal, so mergers and acquisitions within a smaller BHP Metals business would have an ability to make a difference, and Metals would have the cash flow to support large scale mergers and acquisitions.
Are BHP shares currently attractive?
Citi currently rates BHP as a buy, with a price target of $50. That implies a possible upside of around 10% for the mining giant.
Using Citi's estimates, the broker believes that the BHP share price is valued at seven times FY22's estimated earnings. Citi expecting another strong year of profit in FY23, with the profit projection putting BHP shares at 7.2 times FY23's estimated earnings.
As mentioned, the BHP dividend is a sizeable factor in the total returns from the ASX mining share.
Citi's numbers suggest that BHP is going to pay a grossed-up dividend yield of 15% in FY22 and 13.8% in FY23.
