BHP Group Ltd, formerly BHP Billiton Ltd, is a global resources company. The Company is a producer of various commodities, including iron ore, metallurgical coal, copper and uranium. Its segments include Petroleum, Copper, Iron Ore and Coal. The Petroleum segment is engaged in the exploration, development and production of oil and gas. The Copper segment is engaged in mining of copper, silver, lead, zinc, molybdenum, uranium and gold. The Iron Ore segment is engaged in mining of iron ore. The Coal segment is engaged in mining of metallurgical coal and thermal (energy) coal. Its businesses include Minerals Australia, Minerals Americas, Petroleum and Marketing. The Company extracts and processes minerals, oil and gas from its production operations located primarily in Australia and the Americas (BHP, 2019). The Company manages product distribution through its global logistics chain, including freight and pipeline transportation. SWOT analysis is a strategic planning tool that can be used by BHP Billiton Limited managers to do a situational analysis of the organization. It is a handy technique to map out the present Strengths (S), Weakness (W), Opportunities (O) & Threats (T) BHP Billiton Limited is facing in its current business environment. The BHP Billiton Limited is one of the leading companies in its industry. BHP Billiton Limited maintains its dominant position in market by carefully analyzing and reviewing the SWOT analysis. SWOT analysis a highly interactive process and requires effective coordination among various departments within the company such as – marketing, finance, operations, management information systems and strategic planning (BHP, 2016).
BHP Group Ltd selected in this Financial Analysis assignment is an Anglo-Australian Company that is into multinational mining. The headquarters of the company is situated in Victoria, Australia. This is traded in the Australian Stock Exchange by the name of BHP. The company was founded in the year of 1885. The revenue of the company is US$43.638 billion. The net income of the company is US$4.823 billion (BHP, 2019). The employees working under the company worldwide is sixty-two thousand. The report will provide people information that will help them to analyse the work done by the company and the position of the finance in the market. This will also help them to check whether they can invest their money in the company or not (Bhp.com., 2017).
The world at present is intensely competitive. The competition is so intense that it’s getting difficult for the businesses to compete against the prevailing competition. Businesses are analyzing their position in the global market very frequently to establish their position in the competitive battle. Often the businesses opt to conduct their business functional and operational analysis to determine their strengths and weaknesses. SWOT analysis is a suitable marketing strategy used to analyze an organization’s business strengths, weaknesses, opportunities and threats. SWOT analysis enable an organization scrutinize its prevailing external and internal issues. These evaluations are then furthered used to make appropriate changes and amendments so stay ahead in the race.
SWOT Analysis of BHP
The central purpose of SWOT matrix is to identify the strategies that a company can utilize to exploit external opportunities, counter threats, and build on & protect BHP Billiton Limited strengths, and eradicate its weaknesses.
Strengths of BHP Billiton Limited – Internal Strategic Factors
As one of the leading firms in its industry, BHP Billiton Limited has numerous strengths that enable it to thrive in the market place. These strengths not only help it to protect the market share in existing markets but also help in penetrating new markets. Based on Fern Fort University extensive research – some of the strengths of BHP Billiton Limited are –
• Automation of activities brought consistency of quality to BHP Billiton Limited products and has enabled the company to scale up and scale down based on the demand conditions in the market.
• High level of customer satisfaction – the company with its dedicated customer relationship management department has able to achieve a high level of customer satisfaction among present customers and good brand equity among the potential customers.
• Reliable suppliers – It has a strong base of reliable supplier of raw material thus enabling the company to overcome any supply chain bottlenecks.
• Good Returns on Capital Expenditure – BHP Billiton Limited is relatively successful at execution of new projects and generated good returns on capital expenditure by building new revenue streams.
Weakness of BHP Billiton Limited – Internal Strategic Factors
Weakness are the areas where BHP Billiton Limited can improve upon. Strategy is about making choices and weakness are the areas where an organization can improve using SWOT analysis and build on its competitive advantage and strategic positioning.
• The marketing of the products left a lot to be desired. Even though the product is a success in terms of sale but its positioning and unique selling proposition is not clearly defined which can lead to the attacks in this segment from the competitors.
• The profitability ratio and Net Contribution % of BHP Billiton Limited are below the industry average.
• Not very good at product demand forecasting leading to higher rate of missed opportunities compare to its competitors. One of the reason why the days inventory is high compare to its competitors is that BHP Billiton Limited is not very good at demand forecasting thus end up keeping higher inventory both in-house and in channel.
• Investment in Research and Development is below the fastest growing players in the industry. Even though BHP Billiton Limited is spending above the industry average on Research and Development, it has not been able to compete with the leading players in the industry in terms of innovation. It has come across as a mature firm looking forward to bring out products based on tested features in the market.
Opportunities for BHP Billiton Limited – External Strategic Factors
• Government green drive also opens an opportunity for procurement of BHP Billiton Limited products by the state as well as federal government contractors (Wrigley, 1970).
• New environmental policies – The new opportunities will create a level playing field for all the players in the industry. It represent a great opportunity for BHP Billiton Limited to drive home its advantage in new technology and gain market share in the new product category.
• Stable free cash flow provides opportunities to invest in adjacent product segments. With more cash in bank the company can invest in new technologies as well as in new products segments. This should open a window of opportunity for BHP Billiton Limited in other product categories.
• New customers from online channel – Over the past few years the company has invested vast sum of money into the online platform. This investment has opened new sales channel for BHP Billiton Limited. In the next few years the company can leverage this opportunity by knowing its customer better and serving their needs using big data analytics.
• The new technology provides an opportunity to BHP Billiton Limited to practices differentiated pricing strategy in the new market. It will enable the firm to maintain its loyal customers with great service and lure new customers through other value oriented propositions (Chandle, 1962).
Threats BHP Billiton Limited Facing – External Strategic Factors
• Growing strengths of local distributors also presents a threat in some markets as the competition is paying higher margins to the local distributors.
• New technologies developed by the competitor or market disruptor could be a serious threat to the industry in medium to long term future.
• Intense competition – Stable profitability has increased the number of players in the industry over last two years which has put downward pressure on not only profitability but also on overall sales.
• As the company is operating in numerous countries it is exposed to currency fluctuations especially given the volatile political climate in number of markets across the world.
• Shortage of skilled workforce in certain global market represents a threat to steady growth of profits for BHP Billiton Limited in those marke
Residual income models of equity value have become widely recognized tools in both investment practice and research. Conceptually, residual income is net income less a charge (deduction) for common shareholders’ opportunity cost in generating net income. As an economic concept, residual income has a long history. As far back as the 1920s, BPH employed the concept in evaluating business segments. 1 More recently, residual income has received renewed attention and interest, sometimes under names such as economic profit, abnormal earnings, or economic value added. The appeal of residual income models stems from a shortcoming of traditional accounting. Specifically, although a company’s income statement includes a charge for the cost of debt capital in the form of interest expense, it does not include a charge for the cost of equity capital. A company can have positive net income but may still not be adding value for shareholders if it does not earn more than the cost of equity capital. Residual income concepts have been used in a variety of contexts, including the measurement of internal corporate performance. This chapter, however, will focus on the residual income model for estimating the intrinsic value of common stock.
Analysts will encounter another approach to calculating residual income that yields the same results under certain assumptions. In this BPH company approach, which takes the perspective of all providers of capital (both debt and equity), a capital charge (the company’ s total cost of capital in money terms) is subtracted from the company’ s after – tax operating profit. In the case of BPH company, the capital charge is € 169,000:
Net income for BPH
EBIT € 200,000
Less: Interest Expense 70,000
Pretax Income € 130,000
Less: Income Tax Expense 39,000
Net Income € 91,000
Equity charge Equity capital Cost of equity capital
€ 1,000,000 12%
Equity charge 0.12 X € 1,000,000 = €120,000
Debt charge 0.07(1 – 0.30) X € 1,000,000 =49,000
Total capital charge € 169,000
BPH’s net operating profit after taxes (NOPAT) is € 140,000 ( € 200,000 – 30% taxes). The capital charge of € 169,000 is higher than the after – tax operating profit of € 140,000 by € 29,000 As illustrated in the following table, both approaches yield the same results in this case because of two assumptions. First, this example assumes that the marginal cost of debt equals the current cost of debt, that is, the cost used to determine net income. Specifi cally, in this instance, the after – tax interest expense incorporated in net income [ € 49,000 € 70,000 (1 – 30%)] is equal to the after – tax cost of debt incorporated into the capital charge. Second, this example assumes that the weights used to calculate the capital charge are derived from the book value of debt and equity. Specifically, it uses the weights of 50 percent debt and 50 percent equity.
Valuation under Abnormal Earnings Growth (AEG) Model
The AEG model focuses on future earnings and earnings growth. In particular, a parsimonious version based on next year expected earnings and expected abnormal earnings growth in the short and the long run is promoted in OJ 2005. As the authors put it: In a very real sense, the core of the [AEG] model shows how the current price depends on forward eps and their subsequent growth as captured by two dividend-policy independent measures of eps growth. This focus on the prediction of earnings, rather than on the future distribution of wealth (i. e., dividends net of capital contributions), is an attractive model feature. More precisely, there is dividend policy irrelevance, meaning that the value of owners’ equity does not depend on parameters relating to the choice of a particular dividend policy.
The operating earnings oxt in year t are equal to sales minus cash operating costs minus depreciation. Free cash flow is operating earnings plus depreciation in capital expenditures minus investment in working capital and turns out to be 27.4087 in year 1. Suppose the discount rate r is 10%. The value of the operations is then 27.4087/ (0.1−0.0302) = 392.6751
Reverse engineering involves the identication of the components of a software system and their interdependencies, along with the extraction of system abstractions and design information . Intuitively, reverse engineering helps developers understand the architecture of large software systems. Several tools have been designed and built towards this goal. The majority of legacy systems are undocumented, and even if documentation exists, reverse engineering tools help engineers compare the as-implemented with the as-documented or the as-designed structure of the underlined system.
The market price of $5.32 is the closing price for 2019. At first, we need to find the value of
speculative growth. We calculate the value of speculative growth by subtracting no-growth
value from the market price. To obtain no-growth value, we first need to calculate the book
value per share (BPS). BPS is calculated by adding previous year’s BPS and current year EPS
and subtracting DPS which is 0 in this case. Then, residual earning is calculated @ 10.01%
rate of return.
Residual Earning 2020 = EPS 2019– (BPS 2019 * 0.1001)
The calculated residual earning is then discounted to its present value. Now, we can attain no-
growth value by adding BPS of the current year and the total present value of residual
earning. Here, no-growth value is calculated to be $3.543. This value is subtracted from
market price of $5.32 to get the value of speculative growth of ($5.32-$2.543) = 2.777 From this calculation, we get the implied growth rate to be 8.544%
Although the SWOT analysis is widely used as a strategic planning tool, the analysis does have its share of limitations.
-Certain capabilities or factors of an organization can be both a strength and weakness at the same time. This is one of the major limitations of SWOT analysis. For example changing environmental regulations can be both a threat to company it can also be an opportunity in a sense that it will enable the company to be on a level playing field or at advantage to competitors if it able to develop the products faster than the competitors. (Porter, 1980)
-SWOT does not show how to achieve a competitive advantage, so it must not be an end in itself.
-The matrix is only a starting point for a discussion on how proposed strategies could be implemented. It provided an evaluation window but not an implementation plan based on strategic competitiveness of BHP Billiton Limited
-SWOT is a static assessment – analysis of status quo with few prospective changes. As circumstances, capabilities, threats, and strategies change, the dynamics of a competitive environment may not be revealed in a single matrix.
-SWOT analysis may lead the firm to overemphasize a single internal or external factor in formulating strategies. There are interrelationships among the key internal and external factors that SWOT does not reveal that may be important in devising strategies.
In light of the above mentioned limitations of the SWOT analysis / matrix, corporate managers decided to provide weightage to each internal strength and weakness of the firm. Organizations also assess the likelihood of events taking place in the coming future and how strong their impact could be on company’s performance (White, 1986).
This method is called Weighted SWOT analysis. It is better than doing simplistic SWOT analysis because with Weighted SWOT Analysis BHP Billiton Limited managers can focus on the most critical factors and discount the non-important one. It also solves the long list problem where organizations ends up making a long list but none of the factors deemed too critical.
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BHP, 2016. 2016 Annual Reporting suite. [Online]
Available at: https://www.bhp.com/media-and-insights/reports-and-presentations/2016/09/2016-annual-reporting-suite
[Accessed 12 July 2020].
BHP, 2019. A leading global resources company.. [Online]
Available at: https://www.bhp.com/
[Accessed 12 July 2020].
Chandle, A. D., 1962. Strategy and Structure. Cambridge, MIT Press.
Porter, M. E., 1980. Competitive Strategy. New York, Free Press.
White, R. E., 1986. Generic Business Strategies, Organizational Context and Performance. An Empirical Investigation, Strategic Management.
Wrigley, L., 1970. Divisional Autonomy and Diversification.