Fortescue Metals Group Ltd

FMG Details

Decent Growth in Topline and Bottom-line: Fortescue Metals Group Ltd (ASX: FMG) is engaged in the mining, processing, and transporting of iron ore. The market capitalisation of the company stood at $55.39 billion as at 24^th August 2020. During FY20, the company successfully implemented its integrated operations and marketing strategy, which played a key role in delivering record shipments, revenue, earnings and operating cashflow. The company reported revenue amounting to US$12.8 billion, up 29% over FY19, reflecting a rise of 6% in ore shipped to 178.2 million tonnes and an increase of 21% in average realised price to US$79/dmt. Underlying EBITDA for the period amounted to US$8.4 billion, indicating a rise of 38% against FY19. During the year, FMG experienced a growth of 49% in the bottom line (Underlying NPAT) to US$4.7 billion.

The company declared a fully franked final dividend of A$1.00 per share, which took the full-year dividend to A$1.76 per share, indicating an increase of 54% over FY19. The company will pay the final dividend on 2^nd October 2020.

Key Financials (Source: Company Reports)

Guidance: For FY21, the company anticipates iron ore shipments in the range of 175 - 180mt. Capital expenditure for FY21 is expected to be in between US$3.0 - US$3.4 billion. The company is scheduled to conduct its Annual General Meeting on 27^th October 2020.

Key Risks: The company’s business is exposed to transitional risk, which arises from reduced product demand and reputational damage. In addition, the business is also sensitive to market risks, such as commodity price risk and interest rate risk.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: During FY20, the company continued to generate strong underlying cashflows and reported a rise of 47% in operating cash flows to US$6.4 billion mainly due to rise in underlying EBITDA. At the end of FY20, the net debt balance of the company stood at US$258 million as compared to US$2.1 billion of 30^th June 2019. The closing cash balance for FY20 stood at US$4.9 billion. On technical analysis front, the stock of the company has a support level of ~A$13.564 and a resistance level at ~A$18.912. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Champion Iron Ltd (ASX: CIA), Rio Tinto Ltd (ASX: RIO), Mineral Resources Ltd (ASX: MIN), etc., and arrived at a target price of high single-digit upside (in percentage terms). Considering the decent growth in topline and bottom line, successful integration of operations and marketing strategy, low debt balance, we give a “Hold” recommendation on the stock at the current market price of $18.560 per share, up by 3.168% on 24^th August 2020.

FMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

St Barbara Limited

SBM Details

Growth in Reserves and Resources: St Barbara Limited (ASX: SBM) is involved in the production and exploration of gold with a market capitalisation of $2.38 billion as on 24^th August 2020. During FY20, the company reported underlying net profit after tax amounting of $108 million despite lower production and profit from the Leonora and Simberi operations. SBM recorded a total production of 381,887 ounces with lower production from Gwalia and Simberi against the previous year. SBM reported cash flow from operating activities of $280 million. Due to the Atlantic Gold acquisition in July 2019 and Simberi sulphide drilling completed in December 2019, the company reported a rise in ore reserves and mineral resources to 6.0 Moz and 11.6 Moz, respectively.

The Board of the company has resolved to pay a fully franked dividend of 4 cents per share on 29 September 2020. This took the total dividend for the year to 8 cents per share.  

Financial Performance (Source: Company Reports)

Production Guidance: The strong cash flow generated during FY20 places the company in a decent position for future growth plans. For FY21, the company is expecting gold production in the range of 370,000 to 410,000 ounces at an all-in sustaining cost of between $1,360 per ounce to $1,510 per ounce. In FY21, SBM is likely to incur capital expenditure of $49 million to $57 million.

Key Risks: The company is sensitive to various material business risks such as fluctuations in the united states dollar spot gold price, operating risks and hazards and reliance on transportation facilities and infrastructure.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As on 30^th June 2020, the net cash balance of the company stood at $98 million. Current ratio of the company stood at 2.25x in 1H FY20 as compared to the industry median of 1.78x. This indicates that the company is well-placed to address its short-term obligations against the broader industry. On technical analysis front, the stock of the company has a support level of ~A$3.141 and a resistance level at ~A$3.982. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Regis Resources Ltd (ASX: RRL), OceanaGold Corp (ASX: OGC), Northern Star Resources Ltd (ASX: NST), etc., and arrived at a target price of high single-digit upside (in percentage terms). Thus, in light of the growth in reserves and resources during FY21, decent FY20 production, and strong cash flow, we give a “Hold” recommendation on the stock at the current market price of $3.410 per share, up by 0.59% on 24^th August 2020.

SBM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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