Fortescue Metals Group Limited

FMG Details
 
Execution of Farm-in and Joint Venture Agreement: Fortescue Metals Group Limited (ASX: FMG) is engaged in mining, processing and transporting of iron ore for export from the company's deposits within the Pilbara region of Western Australia. As on 3^rd January 2020, the market capitalisation of the company stood at $33.19 billion. The company has recently announced that it has executed a Farm-in and Joint Venture Agreement with Reward Minerals Ltd where FMG has the right to earn an 80% joint venture interest in the Tenements by spending $2 million over the span of 4 years, with a minimum expenditure obligation of $400,000.

Strong Start to FY20: The company had a strong start to FY20 and stated that 1Q FY20 builds on the record results in FY 2019. In Q1FY20, C1 costs stood at US$12.95/wmt and average revenue stood at US$85/dmt.

During FY19, the company reported an underlying EBITDA of US$6 billion, up from $3.18 billion in FY18 and an underlying NPAT (Net Profit After Tax) of US$3.2 billion, up from $878 million.There is an increase in the shareholder returns and the company paid dividends of A$1.14 per share, representing a payout ratio of 78% of FY19 NPAT.


Financial Performance (Source: Company Reports)

Growth Opportunities: Fortescue has been rapidly evolving, drawing on the entire FMG family to continue to improve on the industry leading efficiency as well as world-class operations to position for the dynamic future growth. It also believes that product diversification and asset development will drive future growth and expects that the opportunities will come through the inevitable growth in electric vehicles and the demand for battery materials.

Valuation Methodology: Price/Cash Flow Multiple Approach

Price/Cash Flow Multiple (Source: Thomson Reuters)

Note:All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of FMG gave a return of 17.43% in the past 6 months and a return of 7.58% in the last one month. In the time span of 4 years from FY15 to FY19, the company witnessed a CAGR of 43.4% in gross profit. During FY19, net margin of the company stood at 32% as compared to the industry median of 11.7%. In the same time period, Return on Equity was 31.4%, higher than the industry median of 12.4%. This indicates that the company has been delivering decent returns to its shareholders and is capable of converting its revenue into profits. Considering the returns, CAGR in gross profit, high net margin and ROE, and decent growth opportunities, we have valued the stock using Price/Cash Flow based valuation and have arrived at a target price with an upside of mid-single digit (in percentage terms). Hence, we recommend a “Hold” recommendation on the stock at the current market price of $10.750, down by 0.278% on January 03, 2020. 


FMG Daily Technical Chart (Source: Thomson Reuters)
 

BHP Group Limited

BHP Details
 
Completion of Minerva Gas Plant Acquisition: BHP Group Limited (ASX: BHP) is engaged in mineral exploration, production and processing and hydrocarbon exploration, production and refining. As on 3^rd January 2020, the market capitalisation of the company stood at $114.74 billion. The company has recently announced that Andrew Mackenzie will retire on 31^st March 2020 and announced that Mike Henry has been appointed Chief Executive Officer of BHP. The company noted that Cooper Energy has announced the completion of transaction for acquisition of Minerva Gas Plant by participants in the Casino Henry joint venture. The plant has been acquired from Minerva Joint Venture participants (in which BHP Petroleum is having 90% interest and Operator, Cooper Energy has 10% interest) following cessation of production from the Minerva gas field.

Increased Value from High-Return Projects: In the span of 5 years, the portfolio has delivered consistent high margins as well as strong returns with average ROCE (Return on Capital Employed) of around 15%. The explorationhas added approximately 800 MMboe in 2C resources since FY17.


Portfolio Returns (Source: Company Reports)

Positioned for Long-Term Value Creation: The company’s strategy identifies how to position the portfolio in order to maximise the long-term value as well as deliver increased returns for the shareholders.The company expects EBITDA margin of over 60% over the next 10 years from the high-quality assets. The company added that a competitive pipeline of options yields around 3% average production CAGR over the period of FY20-30. The company has given the guidance for its conventional petroleum asset and expects the production to be in the range of 110 MMboe to 116 MMboe in FY20 with unit costs of US$10.5-11.5/boe. 

Valuation Methodology: Price/Earnings Multiple Approach

Price/Earnings Multiple Approach (Source: Thomson Reuters)

Note:All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock gave a return of 1.67% in the past one month. In the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 3.83% in gross profit. During FY19, gross margin of the company stood at 60.6%, higher than the industry median of 41.1%. In the same time period, Return on Equity was 16.8% as compared to the industry median of 12.4%. We have valued the stock using a P/E based relative valuation approach, and for the said purpose, we have considered peers like Rio Tinto Ltd (ASX: RIO), South32 Ltd (ASX: S32) and Whitehaven Coal Ltd (ASX: WHC). Therefore, we have arrived at the target price, which is offering an upside potential of lower single-digit (in percentage terms). Hence, we recommend the “Hold” rating on the stock at the current market price of $39.150, up by 0.513% on January 03, 2020. 

 
BHP Daily Technical Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.