BHP released their Half Year results to 31 December 2021 , and now I take a closer look. In this post, I make a simple projection of Revenue, Profit, and Equity. I also take the average Price to Sales, Price to Earnings, and Price to Book ratios. I then make my BHP share price forecast for the 2022 financial year.
As is always the case, my forecasts are my opinion only, and I don’t provide them as a recommendation nor as advice. Furthermore, please do not act on anything you read here without first consulting a registered tax agent, financial planner, or a solicitor.
Moreover, I’m going to keep things simple, everything is back-of-the-envelope style. That is to say, this site is not about active trading, nor is it about academic rigour.
First things first, I want to ultimately make a simple share price forecast. To keep it simple I will project revenue, earnings (profit), and equity (book value) into the next financial year. To make each projection, I’m going to use the data I’ve collected for BHP and find their ten year average annual change.
Starting with the Revenue, because revenue (at least the change in revenue) is a good indication of how well a company’s product is selling. In other words, is the company getting the right product to the right place at the right time, and for the right price? BHP’s ten year average change in annual revenue comes to 0.6%. Last year’s revenue was $60.8B. Multiplying the average change by the last known value forecasts revenue of $64.5B for year 2022.
Next, I like to look at their earnings. I include earnings as this is a good sign of how well a company converts its revenue into profit. Again, I take the ten year average change in annual earnings of -4.6%. Last year finished with a profit of $13.5B. Multiplying the annual average change to the last known figure gives us forecast earnings of $12.8B for year 2022.
Third, I like to look at the Equity or Book Value. This is a good measure of how well a company manages and cares for its assets. Theoretically, if you sold everything the company owns and paid off all of its debts, this is how much you will have left over. Once more, I take the average ten year annual change in equity of 2.2%. Last year they reported equity at $67.1B. Multiplying out the average change to the last known figure I get a forecast equity value of $68.5B.
To make my BHP share price forecast for 2022 I will take a look at the historical revenue, profit, and equity. I have included the Price to Sales Ratio, Price to Earnings Ratio, and the Price to Book Ratio in the BHP company page. To make each ratio I first divide each of the revenue, earnings, and equity values by the number of ordinary shares issued. That gives the revenue per share, earnings per share, and equity per share. Once I know those figures, I then divide the share price by each of the per share values I just made. Now, to make the forecast, I will take the ten year average of each ratio.
But first, I need to make an assumption. I will calculate the value per share for each of the revenue, earnings, and equity. Since I want to know the last known value per share, I’ll use the last known 5,057,923,190 ordinary shares.
BHP is unique in that we know they will drastically increase the number of shares on issue through their BHP Group Plc and BHP Group Ltd unification. We can ignore this as the transfer is a one-for-one exchange, and the BHP company page figures already account for the total number. Same number, different location.
Over ten years the Price to Sales Ratio is 3.41. An easy way to understand this number is to think that it will take an average of nearly three and a half years worth of sales to pay back the value of each share.
The forecast Revenue per Share comes out to $12.09 (~$64.5B / ~5B shares). On average, we expect to receive $12.09 of revenue per share at 30 June 2022.
In the same way as for revenue the ten year average Price to Earnings Ratio comes to 15.7. In other words, on average, it would take nearly sixteen years of earnings to pay you back for what you paid for a share in BHP.
The forecast Earnings per Share comes to $2.54 (~$12.8B / ~5B shares). In other words, we expect, on average to receive $2.54 of profit per share by 30 June 2022.
And once more, as above, this time for equity. The ten year average Price to Book Ratio is 2.72. A little different to the others, this time it suggests that you paid $2.72 for every dollar in equity. Or, to put it another way, if they sold all assets and paid all debts you’ll be left with $0.37 (1 / 2.72) for every dollar you invested.
The Equity per Share, otherwise called Book Value per Share, is $13.55. Put another way, by 30 June 2022, we expect to have $13.55 of net assets for each share.
Now it’s time to put our money where our mouth is. Using all of the figures we’ve just calculated, I can work out a share price for each of revenue, earnings, and equity.
Starting with revenue, a fair share price based on BHP’s ability to sell it’s goods is $41.24. I made that by multiplying out the forecast revenue per share ($12.09) by the average price to sales ratio (3.41).
Looking next at earnings, a fair share price based on BHP’s profitability is $39.85. That’s the forecast earnings per share ($2.54) multiplied by the average price to earnings ratio (15.7).
Finally, a fair share price based on BHP’s book value is $36.86. Or, the forecast equity per share ($13.55) multiplied by the average price to book ratio (2.72).
Since three different prices are little use to us, we now need to consider a single fair price. If we consider that BHP’s results come from the average of their ability to sell, ability to convert revenue to profit, and their ability to manage their assets, then it makes sense to average our forecast prices above.
My BHP Share Price Forecast for 2022
For the year financial year ended 30 June 2022, I forecast BHP’s share price to close at $39.32 (The simple average of $41.24, $39.85, and $36.86).