Stocks’ Details

Fortescue Metals Group Limited

Stellar growth in top-line and bottom-line:Fortescue Metals Group Limited (ASX: FMG) is engaged in the exploration, development, production, processing and sale of iron ore. Recently, the company updated that one of its Directors, Ms Elizabeth Gaines acquired 206,294 ordinary shares and disposed 216,695 units on vesting FY2019 Performance Rights as on 30 August 2019.

Recently, the company has successfully completed a US$600 million offering of Senior Unsecured Notes at an interest rate of 4.5%, maturing on 15 September 2027. The company will use the funds in partial repayment of US$600 million of the outstanding US$1.4 billion 2022 Syndicated Term Loan Facility.

FY19 Financial Highlights:Fortescue Metals Group Limited posted a stellar performance in FY19, wherein the company posted revenue of US$9,965 million, higher by ~45% on y-o-y. Net profit on an underlying basis came in at US$ 3,187 million, posting a growth of 195% on FY18. Higher growth in top-line and bottom-line was driven by ~48% increase in average revenue at US$65 per dry metric tonne (dmt) and growth in shipment of higher value products. The company reported underlying EBITDA at $6,047 million, a whopping growth of 90% on pcp. Total shipment of Ore was recorded at 167.7 million tonnes (mt), lower by 1% on y-o-y. Among the product mix, Fortescue blend constituted 43% and super special fines accounted a 37% of the total shipment in FY19. On the balance sheet front, the company increased cash on hand to US$1.9 Bn at 30 June 2019, while net debt reduced to US$2.1 Bn, which is the lowest level since achieving current production capacity in FY14. During the year, FMG’s integrated operations and marketing strategy helped the company with respect to increase the volume of higher value products shipped, including West Pilbara Fines. The year was marked by moderation of steel mill margins and narrowing of price spreads in China from late 2018, resulting in, higher demand for high value products. During the year, the business experienced a strong movement in iron ore prices followed by supply disruptions in Brazil and Australia during the first quarter of 2019, resulting to significant drawdowns in iron ore inventories at Chinese ports.


FY19 Financial highlights Source: Company Reports

The Board of Directors declared a fully franked final dividend of A$0.24 per ordinary share, payable on 2 October 2019.

Outlook:As per FY20 Guidance, the Management forecasts 170-175mt of shipments, including 17-20mt of West Pilbara Fines product. Operating costs of mining, processing, rail and port (C1) are expected to be in the range of US$13.25-13.75/wmt. The management mentioned a total capital expenditure of US$2.4 billion allocated for US$700 million in sustaining capital, US$200 million in Operational development and US$150 million for Queens Valley development. FMG is likely to invest US$700 million and US$500 million for its major projects Eliwana and Iron Bridge, respectively. Capital expenditure for exploration purpose is estimated at US$140 million for FY20. The Board notified that dividend pay-out ratio is likely to remain in between 50% and 80 % of full year NPAT.

Stock Recommendation:The stock of FMG is trading at $8.600 with a market capitalization of ~$26.05 billion. The 52-week trading range of the stock stands at $3.224 to $9.550 and the stock is currently inching towards the higher band of it. The stock of FMG has given stellar returns of 42.74% and 156.20% in the last six months and twelve months, respectively. The stock is available at a price to earnings multiple of 5.75x with an annual dividend yield of 5.08%. We expect the business to deliver favorable earnings growth and improved margin on account of higher shipment of value-added products. Considering the aforesaid facts and current trading levels, we recommend a ‘Hold’ rating on the stock at the current market price of $8.600, up 1.655% as on 10 September 2019.
 

Rural Funds Group

Robust Income growth in FY19:Rural Funds Group (ASX: RFF) is engaged in the leasing of agricultural properties and equipment. The group is a lessor of agricultural property and derives income from leasing several orchards, poultry property and infrastructure, vineyards, cattle properties, cotton properties, agricultural plant and equipment, cattle and water rights. On 09 September 2019, RFF notified that one of its Directors, Leslie Guy Julian Paynter has acquired 1,00,000 ordinary shares at a price consideration of $1.95 per unit via on-market trade. Post this development, Mr. Leslie Guy Julian Paynter now has an indirect stake of 1,559,109 Ordinary units. On the other hand, Sumitomo Mitsui Financial Group, Inc., became a substantial shareholder of the company with the voting power of 5.02% since 4 September 2019.

FY19 Financial Highlights:The company recently reported FY19 results, wherein it posted property revenue at $66.391 million, up 30% on pcp aided by JBS transactions, acquisitions, development capital expenditure, and lease indexation. Total comprehensive income (TCI) stood lower during FY19 at $33.078 million as compared to $44.012 million in FY18 on account of $18 million non-cash revaluation decrements on interest rate swaps. The company reported Adjusted Funds From Operations (AFFO) at 13.3 cents per unit, a growth of 4.7% per unit. Adjusted NAV per unit was higher by 7%, driven by independent revaluations of almond orchards, vineyards and water entitlement. Increase in total assets came in at $222.2 million on account of acquisitions, capex and revaluations of almond orchards, vineyards and water entitlement.

The company announced an unfranked ordinary dividend of AUD 0.02711800, payable on 31 October 2019 with a record date and ex-dividend date of 30 September 2019 and 27 September 2019, respectively.


Snapshot of DPU, AFFO and payout ratio (Source: company reports)

Outlook:The management expects AFFO yield during FY20 to remain at 7%, followed by FY20 Distributions per unit (DPU) of 10.85 cents, at 78% payout ratio. The management estimates gearing in the range of 30%-35% along with a growth distribution of 4% p.a.

Stock Recommendation:The stock of RFF is trading at $2.010 with a market capitalization of $669.85 million. The 52-week trading range of the stock stood at $1.360 to $2.420. The stock has gained 10.50% in the last one month. The stock is available at a price to earnings multiple of 19.550x. The annual dividend yield for the stock stands at 5.27%. Owing to the dynamic operating segments, the company is likely to deliver bottom-line growth in the coming years along with healthy dividend payout. Hence, considering the aforesaid factors coupled with recent price movement in the last 1 month and current trading levels, we recommend a ‘Hold’ rating on the stock at the current market price of $2.010, up 0.5% on 10 September 2019.
 

Arafura Resources Limited

Raised Capital for the development of Nolans project: Arafura Resources Limited (ASX: ARU) is engaged in the exploration and development of minerals. The primary project of the company is Nolan project which is consisted of a 7 stage Pilot Program with Stages 5 and 6 completed in 2019 without any negative elements. During the year, ARU raised $23.2 million at $0.085 per share which will be used for the development of Nolans Project and strengthens Arafura’s objective of being Australia’s next fully integrated Neodymium-Praseodymium (NdPr) producer.

FY19 performance highlights:ARU posted revenue from operations during FY19 at $0.127 million as compared to $0.247 million in FY18. The company reported a net loss after tax at $5.854 million during the financial year of FY19. The company reported a cash balance of $5.397 million and net assets of $104.612 million as on 30 June 2019. The company’s Nolans project is considered as an ultra-low-cost producer of NdPr, at approximately US$25.94/kg of NdPr oxide, well below Lynas and other potential developers’ costs.


NdPr Oxide Supply and Demand (Source: Company Reports)

Stock Recommendation:  The market capitalization of the company stood at ~$82.28 million. The stock has delivered returns of -15.50% and 67.31% in the last three months and six months, respectively. The stock has gained 11.43% in the last 5-days and is trading below the average of 52 weeks low and high levels of $0.040 to $0.140. The underlying demand for Neodymium Iron Boron (NdFeB) magnets across all applications is projected to grow by 6% p.a. over the period to 2030. NdFeB demand growth for EV applications is forecasted to grow by 24% p.a.  Coming to the projects of the company, as a part of Project Funding Strategy, the company raised the fund to execute the Nolans project. The company has completed DFS and environmental approval which are critical enablers for the engagement with funding partner.  Hence, considering the aforesaid facts and current trading levels, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.075, down 3.846% as on 10 September 2019.

 
 
Comparative Price Chart (Source: Thomson Reuters)

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