Not entirely convincing
David James |
04 May 2021
The iron ore price is soaring but analysts have a mixed view on Fortescue Metals Group.
Fortescue Metals Group, founded by Twiggy Forrest, is a rare example of a company that has successfully taken on a global duopoly, BHP and Rio Tinto, and managed to carve out a market position. That deserves great credit.
The iron ore price has returned to 2011 levels but the stock market has not massively rewarded the company. The share price is up 17.5 per cent since March 22, but is 13 per cent below its January 6 peak for the year so far.
Analysts are not rushing to advise a buy. UBS has a neutral valuation arguiing that the risk/reward is not compelling “given iron ore downside risk” associated with what they view as a vulnerable iron ore price. But the broker says this is balanced with “high cash returns that are supportive of the share price in the near-term.” UBS has a 12 month price target of $18, and a projected price earnings ratio of 6 for 6/2021 rising to 9.3 for 6/2022.
Citigroup also has a neutral rating and a target price of $21. “FMG is exposed to a single commodity with two mines, leaving it highly exposed to operational and commissioning delays,” the broker says. “It is highly leveraged to the iron ore price and a lower A$ is beneficial to earnings.
“If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our financial and price targets. Conversely, if any of these factors proves to have less of an effect than we anticipate, the stock could materially outperform our target.”
Goldman Sachs has a sell recommendation. It is forecasting a 6/2021 dividend yield of 13.5 per cent. It says the stock is trading at 1.6 times its Net Asset Value (NAV), which is higher that BHP and RIO’s valuation of 1 times NAV. It is also trading at 9 times the 2022-23FY EBITDA – “when iron ore is back at the US$80-90/t level_ versus BHP and RIO’s 5 times 2022-23FY.
Morgans also has a hold, arguing the stock is fully priced. “FMG brought forward its target for carbon neutrality to 2030, a decade earlier than its original guidance. [We are} impressed by its dividend profile and earnings quality, but this does little to ease our concern that we may be at/near peak positivity. We maintain our Hold rating.”
Credit Suisse is more optimist with an outperform rating and target price of $23. It estimates earnings per share growth at 107.6 per cent for 6/2021.