Fortescue Metals Group Ltd

FMG Details

Fortescue Metals Group Ltd (ASX: FMG) deals in the business of exploration as well as development, production, processing, and sale of iron ore. FMG is a global leader in the iron ore industry and it exports 175 to 180 million tonnes of iron ore annually (mtpa). Driven by its focus on technology and innovation ensures, the company remains among the world’s lowest cost iron ore producers. The company owns and operates a fully integrated infrastructure and supply chain with its mining hubs are connected to the five berth Herb Elliott Port and the Judith Street Harbour towage infrastructure in Port Hedland and heavy haul railway.

Robust Performance in H1FY21 (For the Period Ended 31 December 2020)

Strong Growth in Revenue: The company has recorded 44% YoY growth in revenue to US$9.3 billion supported by a 3% increase in ore sold to 90.2 million tonnes (mt) and the benefit of 42% growth in average realised price to US$114 per dry metric tonne (dmt).

Higher Realisation and Cost Management Boost Margin: Driven by the benefits of higher prices and sustained emphasis on cost management through productivity and innovation has resulted in 57% YoY growth in its underlying EBITDA to US$6.6 billion. Resultantly, the underlying EBITDA margin rose to 71% from 65% in the prior corresponding period.

Underlying NPAT Grew Significantly by 66%: Underlying NPAT also grew strongly by 66% YoY to US$4.1 billion with earnings per share rose to US$1.33 (A$1.84).

Dividend: The company has declared a fully franked interim dividend of A$1.47 per share that was 93% above the FY20 interim dividend and represents a payout of 80% of H1FY21 NPAT.

Exhibit 1: Record Revenue and Earnings Performance in H1FY21

Source: Analysis by Kalkine Group

Delivered Solid Operating Performance in Q4FY21 and FY21

Record Shipments: The company has delivered outstanding performance with record quarterly shipments of 49.3 million tonnes in Q4FY21 that led to its highest ever annual shipments of 182.2 million tonnes in FY21.

Record Average Revenue: The company has realized a record average revenue of US$168/dry metric tonne (dmt) in Q4FY21 with revenue per tonne grew significantly by 72% in FY21 compared to FY20 driven by strong market conditions and continued demand for its products.

C1 Cost: C1 cost increased by 2% to US$15.23/wet metric tonne (wmt) from the previous quarter, while in FY21 C1 cost remained in line with guidance at US$13.93/wmt.

Strong Free Cash Flow Generation: Driven by the strength of its operating performance coupled with record average revenue has contributed to robust free cash flow generation in Q4FY21. This contributed to a net cash position of US$2.7 billion on 30 June 2021 from a net debt position of US$1.0 billion on 31 March 2021.

Exhibit 2: Production Summary Trend

Source: Company Reports

Fortescue Future Industries Reached Targets

As per the press release dated 6 July 2021, the company informed that Fortescue Future Industries (FFI), the 100% renewable green energy and industry initiative of the company has achieved its 30 June 2021 targets. The targets that were announced on 15 March 2021 were aimed at initial decarbonisation projects.

Key Metrics

FMG continued to witness improvement in revenue and gross profit from FY18. The company’s gross margin improved from 28.4% in FY18 to 55.2% in FY20 and was higher than the industry median of 30.5%. Further, the company saw sustained improvement in its current ratio from FY17. The company’s current ratio rose to 2.25x from 1.18x in FY17. The improvement in the current ratio indicates that the company possesses better capabilities to meet the short-term obligations. Notably, the company’s cash conversion cycle increased over FY18 to FY20 as it rose to 52.9 days in FY20 from 30.5 days in FY18.

Exhibit 3: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 55.51% of the total shareholding while the top four constitute the maximum holding. Notably, Forrest (John Andrew Henry) and Valin Investments (Singapore) Pte. Ltd. are holding a maximum stake in the company at 36.62% and 7.38%, respectively, as also highlighted in the chart below.

Exhibit 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company’s business is exposed to the risk of reduced product demand as well as reputational damage. Further, it is susceptible to commodity price risk, as its iron ore sales are mainly subject to prevailing market prices. Fluctuations in interest rates and foreign exchange rates are also some other potential risks.

Outlook

The company is hopeful of delivering continued strong results owing to its emphasis on investing in growth through the Iron Bridge Magnetite project and Fortescue Future Industries. Driven by its record performance for the second consecutive year, the company has guided of achieving shipments in the range of 180 - 185 million tonnes in FY22. This reflects its sustained focus on optimising returns from its integrated operations and marketing strategy.

Further, it forecasts C1 cost for FY22 to stay between US$15.00 - US$15.50/wmt and its capital expenditure (excluding FFI) in the range of US$2.8 - US$3.2 billion that includes sustaining and development capital as well as major projects and exploration.

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

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

Over the last 3 months, the stock was down by ~6.04% and, over the last 6 months, the stock was down by ~12.12%. It has made a 52-week low and high of $15.620 and $26.580, respectively.

The stock has been valued using an EV/Sales based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average)  considering its robust performance in FY21 and its growth strategy.

For the purpose of relative valuation, few peers like Macmahon Holdings Ltd (MAH.AX), Rio Tinto Ltd (RIO.AX), among others have been considered.

Considering the aforementioned factors along with its sustained focus on investing in growth, decent outlook, and the current trading levels, we give a “Buy” recommendation on the stock at the current market price of $21.29 per share (Australian Time: 10:00 AM (GMT+10)) on 18^th August 2021.

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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