BHP stock offers diversified growth

Jun 30 2008 by Andrew J Miller, The Journal

BHP Billiton remains our preferred UK mining stock with an upwardly revised fair value estimate of 2450p. The group has quality, low-cost assets.

The stock offers strong diversified growth and defensive characteristics with exposure to iron ore, coal, petroleum and a broad range of base metals operations and is undervalued on most methodologies. BHP Billiton’s takeover approach for Rio Tinto is strategically sound but to succeed BHP may have to sweeten the current 3.4 shares of BHP for every one share of Rio Tinto. Significant synergies of at least $1.7bn are likely both from a revenue and a cost standpoint.

Shares in Eurasian Natural Resources Corporation (ENRC) continue to be rated as an outperform relative to the sector with an upwardly revised fair value of 1625p. ENRC offers good growth opportunities with an above-average industry new project pipeline. It also has good growth characteristics with high exposure to the most attractive commodities (ferrochrome and iron ore rather than more volatile base metal commodities). The favourable risk-reward profile and compelling valuation warrant a positive stance.

Prudential is our preferred play in the UK life insurance sector and we retain our outperform recommendation. Its unique Asian franchise remains the attraction and we expect strong growth to continue, despite financial difficulties in the Far Eastern economies. The Asian new business targets will be met one year early, management recently announced. In the US, management said FFA sales will slow due to the volatile markets, but the upward sloping yield curve and higher credit spread point towards strong fixed annuity sales. In the UK, growth will remain subdued after Prudential’s exit from a number of product lines, but its strong positioning in with-profits products should make it a strong contender to win contracts coming on to the market. With group cash flow improving, we expect possible dividend upgrades. Prudential trades approximately in line with its peers, on an undemanding PE multiple of just 8.3 times, despite the longer term promise of the Asian operations. Prudential remains a perennial takeover target, but the management’s stated preference for the independent route would complicate any approach.

We recently upgraded our recommendation on Vodafone to buy following a fall in the share price. After revising forecasts we are now increasing our fair value to 200p which means the stock is trading at an even greater discount to our DCF- based valuation. The telecommunication sector has delivered a poor Q1 2008 stock price performance due to weak results from some competitors and regulatory concerns. Vodafone has been unfairly de-rated along with the sector. Operationally the company continues to perform well, with a reasonable European outlook with an attractive growth profile in emerging markets. Its high yield means it should be a relatively safe haven in volatile equity markets. It remains our preference in the UK telecommunication sector against BT and we would buy shares now to take advantage of the current weak price.

Andrew J Miller, Regional Centre Head – Barclays Wealth