Fortescue Metals Group Ltd

FMG Details

Clarification Regarding the Recent Change of Relevant Interest: Fortescue Metals Group Ltd (ASX: FMG) is engaged in mining, processing and transporting of iron ore for export from the company’s deposits within the Pilbara region. As on 29^th January 2020, the market capitalisation of the company stood at ~$35.62 billion. In response to media speculation, the company clarified the recent change in interest of Hunan Valin Iron and Steel Group Co. Ltd in Fortescue. In the month of November 2016, Valin issued an exchangeable bond which entitled the bondholders under certain circumstances to exercise an exchange right and receive shares in Fortescue at maturity. The company stated that the bonds have been matured and the bond holders have exercised their exchange right. Notably, Valin’s current relevant interest in Fortescue stood at 10.15%.

FY19-A Record Year: During FY19, the company shipped 167.7 million tonnes at C1 cost of US$13.11/wmt and witnessed an Underlying EBITDA of US$6 billion. In the same time span, net profit after tax of the company stood at US$3.2 billion. The decent financial performance of the company enabled to Board to pay total dividends of A$1.14 per share, representing a payout ratio of 78% of FY19 NPAT. The company also witnessed a strong start to FY20 with average revenue received of US$85/dmt. Shipments for 1Q FY 2020 stood at 42.2 mt at C1 costs of US$12.95/wmt. 


FY19 Financial Performance (Source: Company Reports)

Growth Opportunities: The company is building strong relationships with China and have procured over US$1 billion from China. The company is building business for the long term success primarily underpinned by world class exploration, investment in growth and integrated operations and marketing. It is driving growth through investment in new projects and expects opportunities in energy and technology.

The company provided the guidance for FY20 and expects shipments in the range of 170mt to 175 mt. It also anticipates C1 costs to be in between US$13.25/wmt to US$13.75/wmt. The capital investment is expected to be US$2.4 billion. FMG also expects total dividend pay-out ratio of between 50-80% of full year net profit after tax.

Valuation Methodology: EV/EBITDA valuation Approach

EV/EBITDA Valuation 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 FMG gave a return of 41.96% in the past 6 months and a return of 6.34% in the past one month. During FY19, gross margin of the company stood at 48.7%, higher than the industry median of 38.9%. In the same time span, EBITDA margin and net margin of the company was 60.2% and 32%, as compared to industry median of 28.7% and 10.9%, respectively. Return on Equity of the company stood at 31.4%, higher than the industry median of 12%, implying that the company has been delivering decent returns to its shareholders.

Considering the returns, higher EBITDA and net margins, and decent guidance, we valued the company using EV/EBITDA based relative valuation approach and arrived at a target upside which is giving a return of higher single digit (in percentage terms). Hence, we recommend a “Hold” rating on the stock at the current market price of $11.530 per share, down by 0.346% on 29^th January 2020. 

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