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BHP Billiton (BLT.L) Rating NEUTRAL* M&A PROPOSAL

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BHP Billiton (BLT.L) Rating NEUTRAL* M&A PROPOSAL 17 June 2014 Asia Pacific/Australia Equity Research Diversified Metals & Mining BHP Billiton (BLT.L) Rating NEUTRAL* M&A PROPOSAL Price (09 Jun 14, p) 1,904.00 Target price (p) 2,250.00¹ Market cap. (£mn) 105,152.92 Unscramble the DLC egg Yr avg. mthly trading (pmn) 264,765 Last month's trading (pmn) 218,797 Projected return: ■ Opportunity presents itself to truly simplify: The Ltd/Plc share price Capital gain (%) 18.2 differential at 5% (lowest since 2006), plus talk of simplification involving Dividend yield (net %) 4.0 structural change, is in our view, a once-in-a-decade opportunity to deal with Total return (%) 22.2 the lingering issues of the Dual Listed Company structure. By combining 52-week price range 1,995.0 - 1,666.5 * Stock ratings are relative to the relevant country benchmark. portfolio simplification (asset sales) with structural change (dismantle the ¹Target price is for 12 months. DLC), we believe BHP can kill two birds with one event stone, providing modest structural upside (10%+) while also enhancing long term strategic Research Analysts flexibility (Brambles and AMP/Henderson are examples of DLC unwinding). James Gurry 44 20 7883 7083 A unified share price would make it easier to use scrip as takeover currency [email protected] more adequately addressing long term opportunities… potash: build or buy? Paul McTaggart 61 2 8205 4698 ■ Catalysts: BHP has guided to portfolio simplification and shareholder [email protected] returns in the coming full year result period (production 23-July, financials Martin Kronborg 19-August). The $25bn net debt target for shareholder returns is within reach 61 2 8205 4369 [email protected] (CS FY14F $25.5bn) but we only see meaningful shareholder returns Michael Shillaker ($3bn+) closely linked to potential asset sales. 44 20 7888 1344 [email protected] ■ Key Question: is it better for shareholders? BHP already trades at a Liam Fitzpatrick premium (6.5x EBITDA FY14E) compared to traditional peers (mining 5x, 44 20 7883 8350 conventional oil 5x). In our view, only against shale peers (7x) does a [email protected] SpinCo make sense to capture re-rating potential (shale is 19% of EBITDA Justin Teo for simplified BHP), a modest 3%+. Our analysis suggests that selling the 61 2 8205 4426 [email protected] most attractive non-core assets could fund a $6bn / 4%+ buyback (Nickel Specialist Sales: James Brady West / Cannington CS value $6bn). Capital release potential from undoing 44 20 7888 4267 the DLC is difficult to estimate but at a maximum $10bn representing the net [email protected] assets of Billiton Plc, adding an additional blue-sky 7% upside potential. Share price performance Financial and valuation metrics Year 06/13A 06/14E 06/15E 06/16E Revenue (US$mn) 65,953.0 67,701.7 66,649.7 69,359.3 1899 EBITDA (US$mn) 28,363.0 32,302.3 31,225.0 33,080.0 EBIT (US$mn) 21,002.0 23,909.8 22,162.7 23,302.2 1399 Net income (US$mn) 11,223.0 14,549.0 12,926.3 13,677.0 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 EPS (CS adj.) (USc) 210.17 271.23 240.98 254.97 Price Price relative Change from previous EPS (%) n.a. — — — The price relative chart measures performance against the Consensus EPS (USc) n.a. 269.90 269.20 275.00 FTSE ALL SHARE INDEX which closed at 3662.18 on EPS growth (%) -40.9 29.1 -11.2 5.8 09/06/14 P/E (x) 15.2 11.8 13.3 12.6 On 09/06/14 the spot exchange rate was £.81/Eu 1. - Eu .74/US$1 Dividend (USc) 11,600.00 12,200.00 13,000.00 13,700.00 Dividend yield (%) 3.6 3.8 4.1 4.3 Performance Over 1M 3M 12M P/B (x) 2.4 2.1 2.0 1.8 Absolute (%) 0.4 6.2 5.4 Net debt/equity (%) 36.5 29.5 25.1 18.9 Relative (%) -3.5 1.7 -13.4 Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 17 June 2014 BHP Billiton BLT.L Price (13 Jun 14): 1,850.00p, Rating: NEUTRAL, Target Price: 2,250.00p, Analyst: Paul McTaggart Per share data 06/13A 06/14E 06/15E 06/16E Key earnings drivers 06/13A 06/14E 06/15E 06/16E No. of shares (EOP) 5,340.00 5,364.12 5,364.12 5,364.12 — — — — EPS (Credit Suisse) (US$) 2.10 2.71 2.41 2.55 — — — — DPS (US$) 116.0 122.0 130.0 137.0 — — — — Dividend payout ratio 55.19 44.98 53.95 53.73 — — — — Operating cash flow per share 3.64 4.19 4.24 4.53 — — — — (US$) Income statement (US$mn) 06/13A 06/14E 06/15E 06/16E Growth(%) Total revenue 65,953.0 67,701.7 66,649.7 69,359.3 Sales (8.7) 2.7 (1.6) 4.1 Cost of goods sold 41,530.0 36,863.8 36,754.2 37,613.9 EBIT (23.2) 13.8 (7.3) 5.1 SG&A (excluding R&D) — — — — Net profit (40.9) 29.6 (11.2) 5.8 R&D costs 64.0 64.0 64.0 64.0 EPS (40.9) 29.1 (11.2) 5.8 Other operating inc/(exp.) (4,004.0) (1,528.4) (1,393.5) (1,398.6) Margins (%) EBITDA (US$mn) 28,363.0 32,302.3 31,225.0 33,080.0 EBITDA margin 43.0 47.7 46.8 47.7 Depr & amort (excl. goodwill) 7,361.0 8,392.5 9,062.3 9,777.8 EBIT margin 31.8 35.3 33.3 33.6 Goodwill impairment — — — — Pretax margin 27.5 32.3 30.1 30.7 EBIT (mn) 21,002.0 23,909.8 22,162.7 23,302.2 Net margin 17.0 21.5 19.4 19.7 Net interest income (exp) 1,276 1,118 1,210 1,097 Valuation metrics (%) Net non operating inc (exp) — — — — EV/sales 3.1 2.9 3.0 2.8 Share of associates/JVs' equity — — — — EV/EBITDA 6.1 5.4 5.6 5.3 Exceptionals (1,902.0) 551.0 — — EV/EBIT 9.6 8.3 8.9 8.3 Profit before tax (US$mn) 17,824.0 23,342.4 20,952.4 22,205.1 P/E 15.0 11.6 13.0 12.3 Taxes 5,926.0 7,072.6 6,809.5 7,216.7 P/B 2.4 2.1 1.9 1.8 Profit after tax 11,898.0 16,269.7 14,142.9 14,988.5 ROE analysis (%) Extraordinary gain/(loss) (922.0) 346.0 — — Return on equity stated — — — — Non-controlling interest (minority) 1,597.0 1,374.7 1,216.5 1,311.5 ROIC 15.4 15.9 13.9 14.1 Preferred dividends — — — — Asset turnover 47.4 43.7 41.2 41.5 Reported net income (US$mn) 10,301.0 14,895.0 12,926.3 13,677.0 Interest burden 0.94 0.95 0.95 0.95 Analyst after tax adjustment — — — — Tax burden 0.33 0.30 0.33 0.32 Adjusted net income (US$mn) 11,223.0 14,549.0 12,926.3 13,677.0 Financial leverage 184.9 179.1 173.0 165.2 Credit ratios Cash flow 06/13A 06/14E 06/15E 06/16E Net debt/equity (%) 36.5 29.5 25.1 18.9 EBITDA (US$mn) 28,363.0 32,302.3 31,225.0 33,080.0 Net debt / EBITDA (%) 0.97 0.79 0.75 — Cash taxes paid (7,618.0) (6,140.1) (5,883.1) (6,234.9) Interest coverage ratio 16.5 21.4 18.3 21.2 Change in working capital — — — — Other cash & non-cash items 6,060.0 4,696.8 6,461.5 7,215.0 Quarterly data 06/13A 06/14E 06/15E 06/16E Cash flow from operations 19,444.0 22,466.5 22,741.0 24,282.4 EPS for Q1 — — — — CAPEX (US$mn) (21,930.0) (15,653.3) (13,958.2) (12,637.2) EPS for Q2 — — — — Disposals of PPE 2,338.0 41.0 — — EPS for Q3 — — — — Free cash flow to the firm (US$) 15,915.0 18,202.2 18,477.5 19,954.2 EPS for Q4 — — — — Acquisitions (959.0) (472.0) — — Divestments 2,442.0 736.0 — — Other investment/(outflows) (617.0) (943.0) (1,108.8) (1,219.7) Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, Cash flow from investment (18,726.0) (16,291.3) (15,067.0) (13,856.9) notional interest and unusual items.
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