BHP spin-off to have minimal impact: agencies

CREDIT agencies have reaffirmed BHP Billiton’s ratings after the announcement of a proposed demerger, while the response from analysts has been mixed.
BHP spin-off to have minimal impact: agencies BHP spin-off to have minimal impact: agencies BHP spin-off to have minimal impact: agencies BHP spin-off to have minimal impact: agencies BHP spin-off to have minimal impact: agencies

Broadmeadow longwall mine personnel, Queensland

Kristie Batten

Despite BHP’s plans to go from 41 assets now to just 19 next year, Moody’s Investors Service says the company will remain the world’s largest miner, while maintaining its A1 rating.

"While the proposed spin-off will slightly reduce the company's scale and diversity, BHP Billiton will remain the largest global mining company,” Moody’s vice president and senior analyst Matthew Moore said.

"BHP Billiton's diversity will still benefit from production across several minerals and geographies, as well as the presence of petroleum production, which is a strong differentiating factor when comparing the company with other large globally diversified mining companies.”

The assets to be demerged or eventually sold represent less than 10% of group earnings since 2009 and Moody’s expects the assets to remain in the portfolio to continue to generate strong margins, while the mines being demerged will likely continue to struggle over the next 12 to 18 months.

Standard & Poor's Ratings Services also affirmed its A+/A-1 corporate credit and issue ratings on BHP and the company's associated senior unsecured debt.

"We consider BHP Billiton's business risk profile will remain ‘strong’ should the demerger proceed,” S&P analyst May Zhong said.

“The core assets generated much higher profit margins and returns on capital for the past 10 years, compared with the demerged assets under the proposal.

“More importantly from a credit perspective, we expect the new, leaner BHP Billiton will experience cashflow volatility that will not be materially different from the current portfolio, notwithstanding the moderate reduction in commodity and asset diversity."

Meanwhile, several analysts have downgraded BHP following the earnings and demerger announcements on Tuesday.

CIMB’s Michael Evans cut the stock to hold from add and lowered his price target to $A37.70 from $44.30.

Citi lowered its rating to neutral from buy, while Credit Suisse cut its recommendation to underperform from neutral.

Adrian Wood from Macquarie lowered his rating to neutral from outperform, but lifted the price target to $42.50 from $41.

Duncan Simmonds from Bank of America Merrill Lynch retained a buy rating but increased the price target to $47.50 from $44, while Deutsche Bank’s Paul Young retained a buy rating and lifted his price target to $44.30.