research that says it all

BHP Billiton Ltd (BHP)
BHP is the largest stock in the Australian index and can be seen as a bellwether for
the broader market, with its leverage to global growth similar to our economy. When
BHP performs well it is good for sentiment and thus has an overall positive affect on
the market.
The following commentary from Charlie Aitken outlines the strong investment case for
BHP. Aitken is an institutional dealer with Southern Cross Equities who have strong
expertise in the resource sector.
“There is clearly some irrational pricing based on irrational fear in some parts of the
Australian equity market. BHP is now trading nearly -40% below its all-time high and
commanding a fy08 P/E of just 9x. The FY09 P/E is even lower. The first place to
allocate cash is to Australia's, and one of the world's strongest companies. In risk
adjusted terms on today prices BHP is the single best buy in Australian equities. I
think BHP shares are grossly, grossly oversold, down more than double the index
from the highs, on misplaced fears of US exposure and a higher (dilutive) offer for
RIO.
It's worth remembering that BHP shares were trading $24.00 in January 2007. They
went on to double in less than 12 months all driven by earnings and capital
management growth. I am of the view BHP shares are even lower risk buying today
than they were at $24.00 last January. It's also worth noting that commodity prices
have not collapsed. There is no commodity that BHP sells that is down anywhere near
40% as the share price is. In fact, oil, gold, uranium, nickel, copper, coal, and iron ore
are all either higher or only slightly lower. Production growth is strong as was
evidenced on Wednesday's production report. There is no issue with BHP earnings or
cash flow; if anything the risks to consensus BHP numbers remain to the upside.
Here is how I see the next month playing out in BHP shares. This is why I want to
accumulate them from today's shorters.
1. This week's 2nd qtr production report confirmed record volume growth
2. BHP will formalise the 3:1 RIO offer (on or before 6th of Feb), or they will
simple walk. They will not and should not raise the offer in any way.
3. Hedge funds will dump RIO and cover shorts in BHP (on or before 6th of Feb)
on confirmation of BHP's discipline.
4. IH FY08 earnings will beat expectations due to strong cost control and revenue
growth (6th of Feb)
5. Large scale buyback program will be reinstated (6th of Feb)
6. Analysts upgrade consensus FY08 and FY09 estimates (7th of Feb)
7. Commodity prices rise on aggressive Fed rate cut (late Jan), led by Copper
8. Outflows from global natural resource funds slow (Feb)
9. BHP management talks to investors about BHP's investment case rather than
the BHP/RIO investment case (6th of Feb). The market has responded well to
BHP's extreme levels of disclosure in the last few results presentations.
10. Clarity is brought to all of the above issues. Certainty replaces speculation, and
the response will be a solid recovery in BHP shares from today's grossly,
grossly oversold levels.
GPCA Research Update: 25h January 2008
My view is you need to be fully weighted in BHP on or before the 6th of February. This
company is not going to overpay for RIO as we have consistently written. They will not
improve the offer and in the current market environment they should not improve the
offer. It's worth remembering the last time the ASX200 index was down here RIO
shares were $73.00. We continue to recommend selling RIO and buying BHP.
I realise these are testing times but remaining as unemotional as possible is the way
to profit from these periods. It is always darkest before the dawn.”
Source: Charlie Aitken, Southern Cross Equities 22/01/08