👀 Ones to watch: The MOST undervalued shares to buy right nowSee Undervalued Shares

Jefferies downgrades BHP to "hold" amid capex, M&A risks

Published 04/10/2024, 09:36 pm
© Reuters

© Reuters

BHP
0.18%
BHPB
-0.05%

Investing.com -- Analysts from Jefferies in a note dated Friday downgraded BHP (LON:BHPB) (ASX:BHP) to "hold" from “buy.” The revision stems from a combination of factors related to the company's capex plans, potential M&A risks, and its share price performance. 

Although Jefferies maintains a positive long-term outlook for BHP, they see increasing risks that could offset near-term gains.

Jefferies revised its commodity price forecasts and outlook for the mining sector, adjusting to recent macroeconomic conditions, such as China’s stimulus efforts and potential rate cuts in the US. 

This backdrop has led to a step-change in mining share prices, particularly for metals like copper and aluminum. However, despite the supportive macro environment, the investment case for BHP has become more complex due to potential risks ahead.

One key concern is the possibility of BHP pursuing another acquisition, such as Anglo American (JO:AGLJ), after the six-month restriction period on bidding ends in November. 

This M&A risk, combined with an expected increase in capex, poses potential headwinds for shareholders. Jefferies flagged that BHP is entering a period of elevated spending, driven by its ambitions in copper growth projects, like Filo and Josemaria in Argentina, and the ongoing development of the Jansen potash project in Canada. 

These investments, while necessary for long-term growth, may limit BHP’s ability to deliver returns to shareholders beyond its 50% base payout ratio unless commodity prices exceed expectations.

Another challenge relates to BHP's exposure to metallurgical coal. 

While Jefferies remains bullish on this commodity, BHP’s leverage is limited by the escalating price-based royalty regime in Queensland, which directs much of the upside to the government. This limits the potential for shareholders to benefit from higher met coal prices.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.

BHP shares have performed strongly recently, contributing to the decision to downgrade. Jefferies pointed out that the shares now trade at a premium relative to peers, based on calendar year 2026 estimates. 

At current valuations, Jefferies believes the risk/reward tradeoff is balanced, with limited upside in the near to medium term, leading to the downgrade.

Despite this downgrade, Jefferies remains constructive on the broader metals and mining sector. They view Glencore (LON:GLEN), Freeport-McMoRan (BCBA:FCXm), Alcoa, and Teck Resources (NYSE:TECK) as top picks due to their exposure to favorable commodities and strategic growth opportunities. 

Should you invest $1,000 in BHP right now?

Don't miss out on the next big opportunity! Stay ahead of the curve with ProPicks AI – 6 model portfolios powered by AI stock picks with a stellar performance in 2024.

Unlock ProPicks to find out

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.