Stocks’ Details
 

Fortescue Metals Group Ltd

No Material Impact Expected from Federal Court Decision:Fortescue Metals Group Ltd (ASX: FMG) is a global leader in the iron ore industry involved in the exploration, development, production, processing, and sale of iron ore. On 29 May 2020, the company acknowledged that High Court has not granted special leave to appeal the decision of the Full Federal Court in relation to the recognition of non-exclusive native title held by the Yindjibarndi People over FMG's Solomon Hub mines. The company has reconfirmed that this Full Federal Court’s decision has no impact on its current or future operations or mining tenure at the Solomon Hub, and the company does not expect any material financial impact to the business as a result of the decision.

March Quarter Update:During the March 2020 quarter, the company saw a decent operating performance and delivered record shipments of 42.3 million tonnes of iron ore, up 10% on pcp. Over the period, the robust demand for Fortescue products delivered average revenue of US$73/dry metric tonne. At the end of the March quarter, the company had cash on hand of US$4.2 billion and net cash of US$0.1 billion. 


Production Summary (Source: Company Reports)

What to expect:For FY20, the company expects its total shipment to be in the range of 175 - 177 million tonnes and total capital expenditure to be between US$2.0 - US$2.2 billion. The company’s C1 cost guidance is maintained at US$12.75 - US$13.25/wmt.

Valuation Methodology:P/E Multiple Based Relative Valuation (Illustrative)
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P/E Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation:Over the past few years, the company has maintained strong underlying EBITDA margins through all market cycles. In the past few months, the stock of FMG has performed incredibly well on ASX, as it has risen by 45.07% in the last six months and 73.31% in the last three months. We have valued the stock using the Price to Earnings based illustrative valuation method and have arrived at a target price with high single-digit upside (in % terms). For the purpose, we have taken Champion Iron Ltd (ASX: CIA), Rio Tinto Ltd (ASX: RIO) and Mineral Resources Ltd (ASX: MIN) as peers. Considering the aforesaid facts, the strong demand for Fortescue’s products, the company’s decent performance during March quarter, and expected upside in the valuation, we give a “Hold” recommendation to the stock at the current market price of $14.990, up by 0.807% on 10 June 2020. 

Coca-Cola Amatil Limited

Resilient Performance amid Covid-19 Pandemic:Coca-Cola Amatil Limited (ASX: CCL) is involved in the manufacturing, distribution, and marketing of beverages.On 26 May 2020, the company provided a trading update, wherein, it informed that since 1 April 2020 the company has traded through the tighter COVID-19 lockdown restrictions, whilst simultaneously cycling the traditionally peak Easter and Ramadan trading periods. However, the company’s business has demonstrated resilience and the ability to partially mitigate the adverse impact of the disruptions through its flexible routes to market, diverse channels, disciplined financial management and the strength of its brands.
Strong Cashflow Track Record: The company has a track record of cashflow as it has generated ~$700 million per annum in operating cashflow for the last two years. Further, the company has been able to fund a high level of capital spend and dividend payout whilst still reducing net debt.


Group Ongoing Cashflow (Source: Company Reports)
 
Annual General Meeting Results:The company recently held its Annual General Meeting, wherein the shareholders voted for five resolutions. Following the voting, all five resolutions were passed at the AGM.
 
What to expect:The company is confident that its strong balance sheet, robust cashflows, ample liquidity and solid credit ratings have placed it in a strong financial and operational position to trade through the current challenging period and emerge a stronger and better business. Moving forward, the company is focussed on protecting its workforce, supporting customers, and tightly managing its costs, credit, and capital.

Valuation Methodology:EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the past six months, the stock of CCL gave a negative return of 17.04% and is trading close to its 52 weeks low level, offering investors a decent opportunity for accumulation. We have valued the stock using EV/EBITDA based illustrative relative valuation method and have arrived at a target price with low double-digit upside (in % terms). Considering the company’s resilient performance amid Covid-19, its strong balance sheet, robust cashflows, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $9.410, up by 0.642% on 10 June 2020. 

Wesfarmers Limited

Recognising Actions to Accelerate the Growth of Kmart:Wesfarmers Limited (ASX: WES) is one of Australia’s leading retail groups with a market cap of around $47.36 billion. WES also operates The Kmart Group, comprising Kmart and Target, operating 520 stores across Australia and New Zealand. In a recent update, the company informed that Kmart Group has identified various actions to accelerate the growth of Kmart and address the unsustainable financial performance of Target. WES added that these actions and the further investment in Kmart would improve the overall position of the Kmart Group.

Retail Trading Update:On 9 June 2020, the company provided a retail trading update, wherein it informed that its retail networks have returned to full operation. On FY20 YTD basis, the company reported total online sales growth of 60%. The company also informed that it is witnessing significant demand growth in Bunnings and Officeworks as customers continue to spend more time working, learning, and relaxing at home.


Summary of sales performance (to May 2020) (Source: Company Reports)

Change of Director’s Interest:Recently, one of the Company’s Director, Simon William English acquired 1,170 shares in the company for $39.3580 per share via on-market trade.

Covid-19 Update:On 29 April 2020, the company provided an update on Covid-19, wherein, it informs that all its businesses have implemented several changes to protect the health and safety of team members and customers, supporting continuity of business operations and the associated benefits to customers, suppliers and jobs. In its Bunnings and Officeworks divisions, the company witnessed significant demand growth as customers and their families spent more time working, learning, and relaxing at home. In Kmart and Target, sales growth in the third quarter was broadly in line with the levels achieved in the first half of the financial year, supported by strong growth in online sales. 

Valuation Methodology:EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the past one month, the stock of WES has increased by 10.36% on ASX. We have valued the stock using EV/Sales based illustrative relative valuation method and have arrived at a target price with low double-digit upside (in % terms). Considering the company’s resilient performance amid covid-19, its decent performance in H1FY20, and valuation, we give a “Hold” recommendation on the stock at the current market price of $43.82 (up ~4.908% on 10 June 2020).  

Mineral Resources Limited

March Quarter Update:Mineral Resources Limited (ASX: MIN) is a Perth-based leading mining services company, focused on providing innovative and low-cost solutions across the mining infrastructure supply chain. During the March 2020 quarter, the company’s Mining Services business performed strongly over the period. The company’s total iron ore production for the quarter stood at 3.4 million wet metric tonnes (wmt), up 3% on Q2 FY20 and up over 28% on the prior corresponding period (pcp). It is worth noting that the company’s operations were not materially impacted by COVID-19.


Production and Commodity Shipments (Source: Company Reports)

Expansion of Pilbara Iron Ore Footprint:On 31 March 2020, the company signed a series of agreements with BCI Minerals Limited (ASX: BCI) that will enhance the company’s Pilbara iron ore footprint. These agreements reflect the company’s strong partnership with BCI and provide further opportunity for MRL’s Mining Services business to create value from stranded iron ore deposits in the Pilbara. 

What to expect: The company expects H2FY20 Mining Services EBITDA to be similar to the first half ($172 million), provided that there is no disruption from COVID-19 over Q4 FY20. 

Valuation Methodology:EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the last six months, the stock of MIN has done well on ASX, rising by around 33.18% in the past six months and 21.51% in the last one-month period.We have valued the stock using EV/Sales based illustrative relative valuation method and have arrived at a target price of high single-digit upside (in % terms). For the purpose, we have taken peers like IGO Ltd (ASX: IGO), Western Areas Ltd (ASX: WSA), South32 Ltd (ASX: S32), etc. Considering the company’s decent performance in March quarter, recent series of agreements with BCI Minerals Limited, and expected upside in the valuation, we give a “Hold” recommendation on the stock at the current market price of $21.00, up by 1.01% on 10 June 2020.  

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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