Fortescue Metals Group Ltd

FMG Details

Fortescue Metals Group Ltd (ASX: FMG) deals in the business of exploration, development, production, processing, and sale of iron ore.

FY21 Result Performance (For the Period Ended 30 June 2021)

• The company has recorded 74% YoY growth in revenue to US$22.3 billion in FY21 supported by a 2% increase in ore sold to 181.1 million tonnes (mt) and the benefit of 72% growth in average revenue to US$135 per dry metric tonne (dmt).
• Underlying EBITDA rose 96% YoY to US$16.4 billion and the underlying EBITDA margin rose to 73% supported by the strength in revenue received and disciplined cost management.
• NPAT increased significantly by 117% YoY to US$10.3 billion and earnings per share rose to US$3.35 (A$4.48).

Consolidated Income Statement (Source: Company Reports)

Recent Update

The company, on 30 September 2021, announced the temporary suspension of site operations at the Solomon Hub. FMG has been working with the WA Police as well as WA Department of Mines, Industry Regulation and Safety.

Key Appointments

The company, on 23 September 2021, has appointed various key executives that include the appointment of Dino Otranto as the Chief Operating Officer Iron Ore, Felicity Underhill as the Director Australia – Eastern States for Fortescue Future Industries and Gordon Cowe as the Projects Director Fortescue Future Industries. Further, Warren Fish has been recruited as Director Aboriginal Engagement, Community, Environment and Government.

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.

Outlook

The company estimates its iron ore shipments to remain between 180 – 185mt in FY22. Further, it forecasts C1 cost for FY22 to stay between US$15.00 - US$15.50/wmt and its capital expenditure (excluding FFI) to remain in the range of US$2.8 - US$3.2 billion.

The company is confident of delivering continued strong results driven by a solid kick start to FY22 as well as through operational excellence, continued emphasis on productivity, and disciplined approach to capital allocation.

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

Technical Overview:

Chart:

Source: REFINITIV

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

Stock Recommendation

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

For the purposes of relative valuation, few peers like Alkane Resources Ltd (ALK.AX), Mincor Resources NL (MCR.AX), among others have been considered.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $14.570 per share, down by 2.607% on 1^st October 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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