Fortescue Metals Group Ltd

FMG Details

Exhibiting Improved Capital Efficiency: Fortescue Metals Group Ltd (ASX: FMG) is actively engaged in the exploration, development, production, processing, and sale of iron ore. Fortescue owns and operates a fully integrated infrastructure and supply chain. The company has been exhibiting higher returns on capital employed (ROCE) over FY16 till 1HFY21. The company has improved its ROCE to 46% in 1HFY21 as compared with 10% in FY16.

Financial Highlights for 1HFY21: FMG has registered decent financial performance during 1HFY21. The company has posted an increase of 44% YoY in its revenues to US$9.33bn in 1HFY21 as compared with US$6.4bn in 1HFY20 on the back of higher price realisation and a 2% YoY growth in shipments for ore at 90.7 mt in 1HFY21. Furthermore, the company has posted a growth in its underlying EBITDA by 57% to US$6.6bn in 1HFY21 as compared with US$4.2bn in 1HFY20. Similarly, the company has posted an increase of 66% in its underlying NPAT at $4.08bn in 1HFY21 as compared with US$2.4bn in 1HFY20.

Revenue, EBITDA and NPAT Trend (Source: Company Reports)

Raising Capital Via High Yielding Bonds: FMG, along with its subsidiaries, have completed its bond offering of US$1500mn of senior unsecured notes at an interest rate of 4.375%, maturing in April 2031. Due to higher demand for the bonds, the capital raising limit has reached US$1500mn as compared to an initial limit of US$750mn of senior unsecured notes. The main objective to release the bond offerings is to repay FMG’s US$750mn 2022 senior unsecured notes and corporate debts.

Declaration of Dividend: As per the company’s update on 11 March 2021, FMG has declared an interim dividend of A$1.47 per share (fully franked). The company has decided 1 March 2021 as its Ex-Date (Earlier announced on 22 February 2021) and the payment date of 24 March 2021.

Outlook: FMG will concentrate on reducing its operating cost and becoming carbon neutral (By 2030). FMG is aiming to utilize green hydrogen and green electricity for its operations not only to make the environment carbon neutral but also to lessen its operating costs. On the operations front, FMG is expecting an increased shipment to 178-182mt by the end of FY21. As per the company’s guidance, the capital expenditure is likely to be in a range of US$3.0bn-US$3.4bn for FY21.

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

** 1USD = ~1.29 AUD 

Stock Recommendation: In the last one month, FMG has decreased by 18.02% and by 12.65% in the last three months. The current market capitalisation of FMG stands at ~$62.50bn as on 19 March 2021. The stock is currently trading slightly above the average 52-week price level range of $9.21-$26.40. On the technical analysis front, the stock has a support level of ~$19.13 and a resistance of ~$23.4. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering improved capital efficiency, and modest outlook.  For this purpose, we have taken peers Rio Tinto Ltd (ASX: RIO), Metals X Ltd (ASX: MLX), Aurelia Metals Ltd (ASX: AMI). Considering the company’s decent financial performance in 1HFY21, higher returns on its capital, payment of dividends to its investors, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $20.01, down by 1.429% as on 19 March 2021.

FMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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