Fortescue Metals Group Limited

FMG Details

Quarterly Production Update: Fortescue Metals Group Limited (ASX: FMG) operates as an iron ore mining company that owns Chichester Hub and Solomon Hub, both located in Pilbara, Western Australia.

Q1FY22 Update: FMG shipped 45.6 million tonnes of iron ore during Q1 FY22, an increase of 3% over Q1 FY21. It had experienced an increase in input costs, particularly diesel and labour rates. Integration of the new mining hub at Eliwana also inflated the C1 costs at US$15.25/wmt as compared to US$12.74/wmt in pcp. FMG is committed to reducing emissions with a new hydrogen manufacturing center at Gladstone, Queensland. It had committed to reach net-zero Scope 3 emission by 2040.

Financial Position: FMG closed the quarter with a cash balance of US$4.1 billion as of 30^th September 2021, down from US$6.9 billion posted on 30^th June 2021. This was due to cash outflows owing to US$4.7 billion towards the FY21 final dividend and US$744 million related to capex. It had sought extension of a revolving line of credit and term loan with maturities extended to 2025 and 2026, respectively. Both these facilities aided FMG with undrawn liquidity of US$1.4 billion.

Q1FY22 Shipments, Analysis by Kalkine Group

Key Risks and Challenges

FMG is exposed to iron ore prices and realization impacted by global steel demand and crude price movements. An increase in cost overruns in exploration activities may affect profitability and drain cash balance. Fluctuations in foreign currency may erode earnings.

Outlook

FMG is expecting iron ore shipments to be in the range of 180-185 mt for FY22. It is anticipating C1 costs to be in the range of US$15.00 to US$15.50/wmt given the prolonged impact of the pandemic on the labour market.

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

Stock Recommendation

The stock of FMG gave a negative return of ~36.59% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $13.900 - $26.580. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers, considering the uptick in shipments in Q1FY22. For the purpose of valuation, few peers like BHP Group Ltd (ASX: BHP), South32 Ltd (ASX: S32), Iluka Resources Ltd. (ASX: ILU), and others have been considered. Considering the iron exploration activities at Nyidinghu, completion of the airborne magnetic survey and soil sampling studies at its Paterson and Rudall project in Western Australia, fovurable Q1FY22 performance, decent outlook, valuation and current trading levels, we give a “Buy” recommendation on the stock at the closing price of $14.280 as of 10^th November 2021, down ~2.125%.

FMG Daily Technical Chart, Data Source: REFINITIV

Note: The purple line at the bottom of the chart reflects the RSI (14-day period)

Brambles Ltd

BXB Details

Q1FY22 Trading Update: Brambles Limited (ASX: BXB) provides logistics supply chain solutions with operating segments in North America, Latin America, Europe, the Middle East, Africa, and India.

In the recent quarter update, BXB witnessed an 8.9% uptick in sales in Q1FY22 over pcp. All of its geographic segments showed positive momentum, with Americas improving from US$610.2 million in Q1FY21 to US$663.0 million in Q1FY22. Recovery in the automobile business favored sales to Europe. Australia showed increased demand for pallets driven by at-home consumption. On the costs front, BXB experienced additional plant and transportation costs, and pallet supply took longer cycle times in North America. Lumber and labour availability also impacted the operations during the quarter period.

Buy-back and Dividend Plans: The company is conducting on-market buyback. During the year, it had bought back about 168 million shares for a total consideration of A$1.9 billion. It plans to conduct on-market buy-back for ~144.4 million shares (representing 10% of issued shares) for the 12-month period. On the dividends front, BXB is expecting a dividends payout of between 45-60% for FY22. 

Q1FY22 Sales Comparison, Analysis by Kalkine Group

Key Risks and Challenges

The pandemic has impacted the company’s operations, with the availability of pallets and lumber prices impacting the earnings. An increasing competitive landscape may affect pricing power and supply of products.

Outlook

BXB is expecting revenue growth of 5-7% in FY22 and underlying profit to grow softly by 1-2% with the inclusion of US$50 million transformation costs. Free cash flows are to be impacted by the reversal of benefits from deferred pallet purchases and is expected to see outflows of US$200 million.

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

Stock Recommendation

The stock of BXB gave a negative return of ~9.96% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $9.780-$12.700. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers, considering the increased sales across geographical segments in Q1FY22. For the purpose of valuation, few peers like SG Fleet Group Ltd. (ASX: SGF), Cleanaway Waste Management Ltd. (ASX: CWY), Qube Holdings Ltd (ASX: QUB), and others have been considered. Considering the decent outlook for FY22, valuation, current trading levels and key business risks, we give a “Buy” recommendation on the stock at the current market price of $10.385 as of 10^th November 2021, 1:37 PM (GMT +10), Sydney, Australia.

BXB Daily Technical Chart, Data Source: REFINITIV

Note: The purple line at the bottom of the chart reflects the RSI (14-day period) 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: - 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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