Stocks’ Details
 

Fortescue Metals Group Ltd

1H20 Financial and Operational Highlights: Fortescue Metals Group Ltd (ASX: FMG) is engaged in mining, processing and transporting of iron ore for export. As on 27 March 2020, the market capitalization of the company stood at $32.39 billion. During 1H20, the company has shipped 88.6million tonnes of iron and generated revenue of US$6.5 million. In the same time span, the company reported an underlying EBITDA of US$4.2 billion and net profit after tax of US$2.5 billion. The decent financial and operational performance enabled the Board to declare a fully franked interim dividend of $0.76 per share, representing a payout ratio of 65% of 1H20 NPAT.

 
Key Highlights of 1HFY20 (Source: Thomson Reuters)

Growth Opportunities and Future Expectations: The company is competitively positioned across its all product segments and is focusing on achieving long term sustainability. The company is also aiming for enhanced returns to shareholders and is targeting Growth and development in the upcoming years.  

Valuation Methodology: Price to Cash Flow Multiple Based Valuation

Price to Cash Flow Multiple Based Approach (Source: Thomson Reuters), *1 USD=~1.65 AUD

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

Stock Recommendation: As per ASX, the stock of FMG is moving towards its 52-week high level of $12.870 and has given a return of 22.04% in the past six months. During 1H20, gross margin of the company stood at 54.9%, higher than the industry median of 46.8%. In the same time span, net margin of the company stood at 37.8% as compared to the industry median of 15.3%. Considering the current trading levels, higher margins and decent outlook, we have valued the stock using price to cash flow based valuation approach and arrived at a target upside of higher single-digit (in percentage terms). For the said purposes, we have considered BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) as peers. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $9.60, down by 8.745% on 27 March 2020. 

South32 Limited

AQD and South32 Extend Strategic Alliance Agreement: South32 Limited (ASX: S32) is engaged in diversified mining and production of metals. As on 27 March 2020, the market capitalization of the company stood at $9.17 billion. The company has recently announced that it has extended the Strategic Alliance Agreement with AusQuest Limited for another two years till 31 December 2021. Under the agreed terms, the company must contribute a total US$4.5 million to earn a 70% interest and can earn an 80% interest in each project by completing a pre-feasibility study.

During 1H20, the company reported an underlying EBITDA of US$678 million and underlying earnings US$131 million. The decent financial and operational performance of the company enabled the Board to pay an interim dividend of US$54 million. 


1H20 Financial Highlights (Source: Company Reports)

Key Priorities: The company is prioritizing to sustainably improve its operating performance and to exit low returning businesses. It is also focusing on maintaining its capital discipline and invest in high returning projects. The company is aiming to deliver lower expenditure of approximately US$160 million in over the next 15 months in order to protect its financial position.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation

Price to Earnings Multiple Based Approach (Source: Thomson Reuters), *1 USD= ~1.65 AUD

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

Stock Recommendation: As per ASX, the stock of S32 is trading very close to its 52-week lower level of $1.585, proffering a decent opportunity for accumulation. The company has recently responded on market conditions and has stated that it is well-positioned to successfully navigate this period of uncertainty.  S32 has a strong balance sheet with reported net cash of US$277 million and no debt. During 1H20, EBITDA margin witnessed an improvement over the previous half and stood at 18%, up from 7.5% in 2H19. In the same time span, net margin of the company stood at 3.1%. Considering the trading levels, improvement in margins and decent outlook, we have valued the stock using price to earnings based valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $1.770, down by 5.851% on 27 March 2020.

Iluka Resources Limited

Slight Increase in EBITDA: Iluka Resources Limited (ASX: ILU) is engaged in exploration, project development, mining operations, processing and marketing of mineral sands. As on 27 March 2020, the market capitalization of the company stood at $3.08 billion. Sumitomo Mitsui Trust Holdings, Inc. has recently changed its relevant interests in the company with present voting of 7.28%. The company has recently released its full year results for the period ending 31 December 2019 wherein it reported an increase of 3% in underlying EBITDA to $616 million and underlying net profit after tax of $279 million. The company has also declared a final fully franked dividend of 8 cents per share, bringing the total dividend for the year to 13 cents per share.


Growth in Underlying Group EBITDA (Source: Company Reports)

What to Expect: The company has provided guidance for FY20 wherein it expects to produce 735kt in total of Zircon, Rutile and Synthetic Rutile. It also expects per Unit cash costs of production $790/t Z/R/SR and Unit cost of goods sold of $860/t Z/R/SR. ILU is likely to incur capital expenditure of approximately $135 million and total non-cash costs of $155 million in FY20.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation

Price to Earnings Multiple Based 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 of ILU is trading close to its 52-weeks’ low level of $5.720, proffering a decent opportunity for the investors to enter the market. During FY19, gross margin of the company stood at 50.3%, higher than the industry median of 43.4%. In the same time span, EBITDA margin of the company was 46.9% as compared to the industry median of 29.5%. Considering the trading levels, higher margins and decent outlook, we have valued the stock using price to earnings based valuation approach and arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $6.730, down by 7.682% on 27 March 2020. 


Comparative Price Chart (Source: Thomson Reuters)

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