Analysts and the market knew that an executive search was being conducted for Marius Kloppers’ replacement, but most didn’t think it would happen so quickly. The new chief executive, Andrew Mackenzie, was actually hired by Kloppers in 2007 and the board went to great lengths yesterday to show that the whole process had been amicable.
But the appointment is indicative of the new flavour of management at big resource companies. Kloppers was known for his propensity to seek out the big deal – the failed bid for Rio immediately comes to mind – but Mackenzie is more internally focussed and management is now expected to concentrate on cost-cutting and improving efficiencies rather than seeking out further acquisitions.
Logical timing
Morningstar senior resources analyst, Mark Taylor, says although the replacement came as a surprise he can understand the logic to it.
“Marius was more famously into bigger picture strategic stuff, takeovers. Not to say that he couldn’t manage the existing business or stripping [costs there from] but it probably makes sense to get a new guy from the start,” he said.
“We’ve just come through a once-in-a-generation boom. I don’t expect that happening again any time soon. That said I’m not expecting a collapse in prices.”
What that means is a change in how companies view their management and a reorganisation at the top for companies like BHP.
Another reality check for the new environment that companies are operating in, was BHP’s big 58% drop in profit over the six-month period announced yesterday. Profit is still pretty hefty at $US4.238 billion. Revenue was down 14.1% to $US32.2 billion. The company blamed lower commodity prices and the higher Australian dollar for the drop. Although a stronger global economy may help improve the future demand for commodities, the addition of some lower cost supply for these commodities may slow further high price rises, according to management.
The profit result was pretty close to market expectations, which explains why the stock didn’t fall that much, closing down 0.9% at $38.65. But it dived on opening this morning to $37.45.
Dividend delivery
One good piece of news out of yesterday was the slight increase in dividends. Taylor says this is in response to investor demand.
“I suppose the dividend – they have made some moves to increase it a bit – it’s sending some modest signal that they are listening to shareholders desire for more dividends but it’s not [huge],” he says.
The interim dividend increased from US 55 cents to US 57 cents. It was nothing to shoot the lights out but a good signal of what might be in store. If Mackenzie can deliver on efficiencies and cost cutting, he should be able to put more into shareholders’ pockets.
Do the current prices make BHP a buy? Morningstar’s Mark Taylor has a fair value of $50 on BHP. That’s higher than much of the rest of the market who have target prices in the low to mid forties.
If you’re a long-term investor, which all SMSF trustees should be, then now might be a good time to get in at a reasonable price, particularly if the dividend outlook is going to improve, but don’t be surprised if it goes lower first.
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