Corporate Accounting Assignment: Analysis of Financial &Market Performance of BHP Group

Question

Task: Required:
This corporate accounting assignment task is a written report and analysis of the financial performance of a selected company in order to provide financial advice to a wealthy investor. It will be based on financial reports of a listed company on the ASX (chosen by the lecturer). This assignment requires students to undertake a comprehensive examination of a firm’s financial performance.

SCOPE of QUESTIONS
Imagine you are an investment adviser, working to build a portfolio of shares for your clients. One of your clients already has a diversified portfolio, which includes managed funds, property; cash and fixed interest and share investments in Australia. You wish to recommend him to consider the (selected) ASX company’s share to add to his / her share portfolio. (Note: The share is the ASX counter allocated by your lecturer.). You are to write a report for him / her to consider the stock. The assignment is a written comprehensive report and analysis of the firms’ financial and market performance.

REQUIRED:
You are required to do the following tasks:
1. Prepare a brief description of the company, outlining its core activities, the market(s) in which it operates within and any factors in the companies’ operating environment which you consider help present a “big picture” of the ASX company.
2. Specify ownership-governance structure of the company:
i) Name the substantial shareholders or institutional investors:
ii) Name the main people involved in the firm governance: The Chairman, Board members, CEO etc.

3. Using the information from the ASX website: www.asx.com.au you must complete the following tasks: i) Prepare a graph / chart for share price movements in the monthly share price over the last one – five years for the company that you are investigating. Plot them against movements in the All Ordinaries Index.

ii) What is the Beta of the share Compare the company’s share price movement with its peers in same industry and to the ASX Indices. For instance, how closely correlated is its share price with the ASX Indices Is the stock more or less volatile (Note: there are two main indices on ASX 1. ASX All Ordinaries Index and 2.S&P / ASX 200).
4. Research on news or major events of the Company (via the internet or financial/business publications):
From research via the internet (using credible sources) or financial/business publications, note any significant announcements which may have influenced the share price of the company. These factors could include merger activities, divestitures, changes in management’s earnings forecasts, changes in analysts’ forecasts, unusual write-offs or abnormal items, macroeconomic factors, industry wide factors, significant management changes, changes in the focus of the company, impact of competitors or lawsuits etc. (Restrict the announcements to major events).

Part B - Financial Analysis: Perform a scenario analysis with data provided Use Excel Spreadsheet
Assume that your selected ASX company is considering a potential new project with a new product launch. You are to factor this new project as part of your evaluation on the company.

The new product is expected to sell for an average price of $25 per unit and the company expects it can sell 500,000 unit per year at this price for a period of five years. Launching this project will require purchase of a $5,500,000 equipment that has residual value in five years of $500,000 and adding $ 80,000 in working capital which is expected to be fully retrieved at the end of the project.

Other information is available below: Depreciation method: straight line (n = 5 years)
Variable cost per unit: $15
Cash fixed costs per year $550 000
Discount rate: 9%
Tax Rate: 25%

Do a scenario analysis with cash flows of the assumed project to determine the sensitivity of the project’s NPV to different scenarios that are defined in terms of the estimated values for each of the project’s value drivers. Please work on two scenarios corresponding to the worst and best-case outcomes for the project. You need to provide your results in (a) relevant tables:
• Worst case: Unit sales decrease by 25%; price per unit decreases by 20%; variable cost per unit increases by 25 %; cash fixed cost per year increases by $90 000
• Best case: Unit sales increase by 25%; price per unit increases by 20%; variable cost per unit decreases by 25%; cash fixed cost per year decreases by $90 000
• Based on the scenario analysis outcome, draw relevant conclusion about project NPV’s sensitivity.

Answer

Brief Description of the company selected in this corporate accounting assignment:
The BHP Group is the leading company in the resources as it is the global resource company and producer of several commodities such as copper, iron ore, coal, copper refinery, copper smelter, and petroleum. BHP group is working in the industry of metals and mining and provides services all over the world. The company has headquartered in Melbourne, Australia, and provides services for the export of minerals and commodities worldwide.

The core activities of the BHP group are divided based on the segments which are as follows:
• Petroleum Segment: The segment is engaged in the business of exploration, development of sites, and production of oil and gas commodities.
• Copper Segment: The segment is working related to the mining of silver, zinc, copper, molybdenum, gold, and uranium.
• Iron Ore Segment: The segment is engaged in the activity of mining iron ore and the supply of iron ore products at a worldwide level.
• Coal Segment: The segment has core activity in the mining of energy coal and metallurgical coal.

The group is engaged in the activity of extracting and process minerals, gas, and oil through the production operations located mainly in Australia and the Americas. The businesses that include in the group are Minerals Americas, Minerals Australia, and Petroleum (Farrington, 2021).

The company is operating in the mining sector hence the major factor that has an impact on the operating environment of the organization is the impact of the manufacturing process on the environment such as carbon emission, pollutions, and negative impact on nature. The company has a wide market size and also working for several future growth commodities such as copper and nickel which are traditionally used in the wiring, power cables, stainless steel, medical equipment, laptops, and television while these commodities are having emerging usages such as wind turbines, electric vehicles, battery charging, solar panels, and grid storage solution.

The group has announced the proposed changes in the corporate structure and portfolio which enable the group to grow more strongly and create long-term value through bringing sustainability in the production of commodities based on economic growth and de-carbonization (BHP Annual report 2021). The ASX code of the company is "BHP.AX" and the current share price is AUD 40.23 per share.

Ownership-governance structure:
The majority of shareholding is held by the institutional shareholders such as mutual funds. The top mutual fund holders in the company are as follows:
• Vanguard International Stock Index
• Vanguard tax-managed funds
• iShares Core MSCI EAFE
• FlexShares
• Fidelity International Index fund
• JP Morgan ETF

Other than the mutual funds the other shareholders of the company are Harding Loevner LP, Goldman Sachs & Co. LLC, and BlackRock Inc. Other than the institutional shareholding the shares of the company are owned by the board of directors also (Nusinov, Ishchenko, and Polishchuk, 2020).

The board of directors and the executive leadership team include the following persons and have the specified position in the company.
Ken Mackenzie: Chairman
Mike Henry: Chief Executive officer
Terry Bowen: Non-executive director
Stefanie Wilkinson: Group company secretary
Athalie Williams: Chief People officer
David Lamont: Chief financial officers

The company has an effective governance structure as the board of directors involves independent non-executive directors. The company has constructed the risk management committee and audit committee which help in implementing effective strategies against the issues faced by the group.

Share price movement:
The share price movement is assessed for the monthly share price movement in the last 1 year and the last 5 years and the comparison is conducted with the S&P ASX 200 index & the all ordinaries index. The movement in share price helps in assessing whether the shares provide effective returns to shareholders or not based on the market return.

The movement of share price in the last 1 year as a comparison to All ordinaries index is as follows:

Based on the above analysis, it is found that the movement of BHP Share price is highly volatile as compared to the market index. The market index has stable movement based on which the shareholders can earn an average 0.95% return on the market index while by investment in a company the shareholders can earn an average 1.68% return in the last 1 year.

The comparison of movement of price in the last 5 years is as follows:

The analysis shows an effective comparison of index price movement and BHP price movement and also shows that in March 2020 there is major fall in the price of the index by 21.51% while the price of BHP is drop by 13.75% means the BHP group has effective return due to industry in which the company is involved (RAMADHANI, 2019).

The average return on all ordinaries index is 0.58% in the last 5 years and the average return on the BHP group is 1.53% in the last 5 years. The company has major fall in the share price in the months August 2021 and September 2021 by 14.73% and 17.54% due to the impact of the international market and policies changes of government related to extractions and exploration of minerals.

The beta of the share:
The beta refers to the systematic risk that provides the volatility of the share price as a comparison of a market index. The beta of the company as compared to all ordinaries index is 1.015 and as compared to S&P ASX 200 index is 1.023 means the share price of BHP is having a higher systematic risk as compared to the market. The average return on the S&P ASX 200 index is 0.52% in the last 5 years. The comparison of movement of share price in the last 5 years is as follows:

Based on the above analysis, it is found that the movement of the ASX 200 index and All Ordinaries Index is comparatively the same while the BHP group has major volatility in the price movement and results in high return along with high risk for the investors.

News and events:
The group has recently approved the project of Jansen Stage 1 potash which is aligned with the strategy of growing the exposure for the future-facing commodities i.e. copper and nickel. The project is expecting to have production of approx 4.35 million tones of potash per annum and the initial production target is in the year 2027. BHP Group and Woodside Petroleum have recently signed an agreement of binding share sale to merge the oil and gas portfolio. Based on the agreement, Woodside will purchase all shares of BHP petroleum International Pty Ltd against the shares of the new Woodside (Vigder, 2020).

Due to an increase in the automobile sector related to electric vehicles and other electric products due to use of copper and nickel has increased over the next 30 years which shows effective growth of BHP in the following years.

Recommendations:
The investment is based on the growth and expected return along with the risk involved in the shares. It is recommended to the investors to make an investment in BHP group and hold the shares for a long-term period which helps in getting effective returns in comparison to a market index. However the BHP group has high volatility as compared to the market and the investment should be made based on the analysis of the company's shares based on the future market growth, size of expansion of business, recent business news, and historical return along with a beta of the securities (Mishchuk, Nusinov, Kashubina, Polishchuk, and Pasichnyk, 2021).

Part B: Financial analysis:
NPV in the normal scenario:

(Shtepa, Suprunenko, Galenko, and Kropelnytska, 2019)
NPV based on the worst case:

NPV based on the best case:

Through the above analysis, it is found that the sales are highly sensitive towards the NPV as the company has negative NPV in the worst conditions in which the selling units decrease to 325000 units and price decrease by 20%. The variable cost is remained the same in the best condition and the worst conditions due to changes in the units and variable cost per unit. The NPV sensitivity analysis is necessary for assessing which factor has highly affected the net present value of the project (Jadun, and Peterson, 2017). Based on the above analysis the company should focus on sales which helps in maintaining the positive NPV of the project.

References:
BHP Annual report 2021, https://www.bhp.com/-/media/documents/investors/annual-reports/2021/210914_bhpannualreport2021.pdfsc_lang=en&hash=15F0B58BC27ADFA860F0BE29B61E199D Farrington, F. 2021. Municipio de Mariana v BHP Group: Implications of the UK High Court’s Decision. Business and Human Rights Journal, 6(2), 392-398.

Jadun, P., Vimmerstedt, L.J., Bush, B.W., Inman, D. and Peterson, S., 2017. Application of a variance based sensitivity analysis method to the Biomass Scenario Learning Model. System Dynamics Review, 33(3-4), pp.311-335. Mishchuk, Y., Nusinov, V., Kashubina, Y., Polishchuk, I. and Pasichnyk, N., 2021. Security of strategic economic interests of mining and metallurgical enterprises in post-industrial conditions as factor of their investment attractiveness.

Nusinov, V., Ishchenko, M. and Polishchuk, I., 2020.Development of strategic guidelines for mining enterprises in the management of their business activities. Corporate accounting assignmentTechnology audit and production reserves, 6(4), p.56.

RAMADHANI, S.N., 2019. COOPERATION BETWEEN MNC AND STATE: BHP BILLITON IN SUPPORTING CHILE’S COMMITMENT ON UN SDG NUMBER 6. A (Doctoral dissertation, President University).

Shtepa, O., Nikolenko, T., Matsuka, V., Suprunenko, S., Galenko, O. and Kropelnytska, S., 2019. Economic-Mathematical Model for Assessing the Sensitivity of International Innovation and Investment Projects.

Vigder, J., 2020. Subject: Submission of Information Requirements and Required Clarifications Associated with the BHP Canada Exploration Drilling Project.