Fortescue Metals Group Ltd
Fascinating short-term rally for Fortescue looks interesting: Fortescue Metals Group Ltd (ASX: FMG) is one of the leading companies in the iron ore industry. It is known for its significant contribution to the development of world-class infrastructure and the portfolio of its mining assets in the Pilbara, Western Australia. Recently, the company announced the cancellation of 7,297,878 fully paid ordinary shares as a part of the on-market share buy-back. Besides this, the company selected NRW Holdings Limited as its Contractor for its Eliwana Rail Project. The total project value is around $57 Mn. As per the contract, NRW will utilize its existing civil construction fleet for the project. Further, the company is committed to maintain its balance sheet strength and flexibility and will continue to invest in the long-term sustainability of the core iron ore business. It is prioritizing growth primarily through exploration activities.
In FY18, Fortescue delivered net profit after tax of US$878 million compared to FY17 US$2,093 Mn, a decrease by ~58.0% primarily on the back ofhigher operating expenses and cost of revenues. However, there was a decrease in C1 costs of US$12.36/wmt, a 4.0% reduction from the prior year. On the other hand, for FY18, the net margin stood at 12.7% marginally better than the industry median of 12.5%, however the operating margin came in at 23.0% in FY18 significantly better than the industry median of 19.0%. The current ratio stood at 1.33x in FY18, showing 12.6% higher than the prior year. Strip ratio across all mining operations increased to 1.4 with the five-year mine strip ratio remaining at 1.5.
Key Metrics (Sources: Company Reports)
Meanwhile, the stock has risen 21.81% in the past three months as at January 11, 2019 and is trading above the average of 52 weeks high and low level of $4.487. it has ~3.08 billion shares outstanding with the market cap of ~$14.1 billion, annual dividend yield of 5.02% (as on 14 January 2019), and a beta of 1.10x (5-Years Monthly basis). The stock has yielded YTD return of 10.36%, and returns of 4.81%, 21.81% and 10.90% over the past six months, three months and one month respectively. With the better margins as compared to industry average and considering the recent performance of the stock over a period of last six months to one year, we uphold our “Buy” recommendation on the stock at the current market price of $4.520. (down 1.31% on January 14, 2019).
Independence Group NL
Strong Y-O-Y performance driven by NOVA operations: Independence Group NL (ASX: IGO) is into mining and exploration. It has a strategic focus on high-quality assets of scale and longevity. It focusses on the evolving strategy to align the business to the structural shift to energy storage. In FY18, the company became a substantial shareholder in Orion Minerals NL via a $5.0 million share placement and secured preferential rights to joint venture/purchase Orion’s nickel projects in highly prospective location. Moreover, IGO is well placed for a strong FY19, with both Nova and Tropicana poised to deliver improved productivity and value. In addition, IGO continues to make good progress with the major value enhancement projects including downstream processing of Nova nickel concentrate.
Three Years Financial Summary (Sources: Company Reports)
The revenue stood at $777.94 million in FY18, increased by 85.0% Y-0-Y approximately on the back of commencement of NOVA operations. NPAT for FY18 was $52.7 million, compared to $17.0 million FY17, mainly driven by the inclusion of the Nova Operation. The balance strengthened with net debt reducing from $164 Mn to $4 Mn during FY18. In FY18, cash and cash equivalents stood at $138.7 million and marketable securities came in at $24.3 million as compared to $35.8 million and $15.3 million respectively in FY17. The key ratios improved significantly on a Y-O-Y basis mainly on the back of the improving financials from the performance of NOVA operations. The asset turnover ratio, ROE and Pre-tax ROA stood at 0.35x, 3.0% and 3.6% in FY18, showing an increase of 77.3%, 1.9%, and 2.3% respectively on a Y-O-Y basis, however these metrics are on the lower side as compared to the industry median of 0.67x, 11.7%, and 8.8%, respectively. The current ratio however improved significantly by 71.1% and stood at 2.90x in FY18, currently higher the industry median of 1.73x.
Meanwhile, the share price has fallen 19.80% on the past six months as at January 11, 2019 and is trading at higher PE multiple of 44.65x. By considering decent financial performance in FY18 along with current trading scenario, we maintain our “Hold” recommendation on the stock at the current market price of $3.950 (down 1.496% on January 14, 2019).
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