Brokers remain acutely bearish on Fortescue despite “strong” result
Fortescue likely made it into many investors’ portfolios over the last few years due to its monster dividend yield post-pandemic period, when a soaring iron ore price delivered it, BHP, and RIO a brief window of super profits. By late 2021, Fortescue’s dividend yield was just shy of 20% p.a.
Since then, the iron ore price has more than halved from its all-time peak of US$233/tonne. Despite this, Fortescue’s shares are trading above the price it attained at its dividend zenith, largely helped by a 50% surge from its September 2023 lows to peak just under $30 in January.
Fortescue’s dividend yield is back to a still respectable 7.4% (fully franked), and its stock price appears to be consolidating. With Fortescue reporting first-half FY24 results last week, now is the perfect time to check up on how the big brokers view Fortescue’s outlook and value proposition. Let’s begin with a quick recap of those results.
Fortescue H1 FY24 results
Key numbers
1H FY24 underlying EBITDA/NPAT of US$5.9B/US$3.3B (Consensus US$5.6B/US$3.3B)
Net debt US$569M (Consensus US$640M)
Free Cash Flow (FCF) US$2.7B (Consensus US$2.57B)
Dividend A$1.08 (65% payout) (Consensus A$1.04)
Key takeaways
Iron Bridge update: Work underway to replace 65km of high-pressure water pipeline to de-risk and improve performance. Scheduled completion mid-2025, not expected to materially impact Iron Bridge ramp-up
December rail derailment issues resolved, facilitates some production catch-up in the second half
2 green hydrogen projects approved in H1 (including Phoenix Hydrogen Hub, USA), with Holmaneset green ammonia (Norway) and Pecem green hydrogen (Brazil) likely to be approved in H2
Decarbonisation spend will accelerate in H2
Guidance
Shipments guidance (192-197Mt) (i.e., no change), includes: 2–4mt for Iron Bridge
C1 cost US$18.00–$19.00/wmt.
Metals capex of US$2.8B–$3.2B.
Energy capex and investments of US$500M, net operating expenditure around US$800M
Broker response
If I could sum up the big broker’s responses in one sentence, it would be: “Good result, but not good value in the stock”.
UBS Rating: SELL; Price Target increased to $24.10 from $24.60
“FMG delivered a strong and clean result in 1H-FY24, but with iron ore prices to ease lower and capex stepping up, FCF falls FY25/FY26E and we remain Sell rated.”
Citi Rating SELL; Price Target increased to $24 from $23
“Modest earnings upgrades in FY24/25…We raise our TP from A$23 to A$24 and stay Sell rated on valuation grounds”
Macquarie: Rating UNDERPERFORM; Price Target $18.50
“FMG is trading on modest free cash flow yields (by its own standards) of 5-8%. With uncertainty over FFI capital, we retain our Underperform rating.”
Goldman Sachs: Rating SELL; Price Target $19.60 from $19.80
“We continue to rate FMG a Sell on: 1. Relative valuation: the stock is trading at a premium to RIO & BHP on our estimates. 2. Widening of low grade 58% Fe product realisations over the medium to long term. 3. Execution and ramp-up risks on the Iron Bridge project and Gabon iron ore over FY24 & FY25.”
Morgan Stanley: Rating UNDERWEIGHT; Price Target $18.80
“Earnings largely in-line. Dividend beat. Risks to Downside: Increased capex guidance at FMG's Iron Bridge or Pilbara Energy connect projects. Weaker-than-expected price realisation for FMG's product mix”
Bell Potter: Rating SELL; Price Target $21.51 from $21.39
“While we have recently upgraded our iron ore price forecast, we still see low growth in global steel demand and a deteriorating pricing environment. Dividend yield as a price support is coming back into play but we retain our Sell recommendation.”
Consensus
Considering these broker reactions, Fortescue’s average rating is “SELL/UNDERPERFORM/UNDERWEIGHT”, and the average price target is $21.09 – a 0.6% reduction from the brokers’ average target prior to the first half FY24 results and a whopping 23% discount to the stock’s trading price at the time of writing ($27.21).
Whether the big brokers love it or hate it, so far, Fortescue has delivered investors a combination of share price gains and a solid fully franked dividend yield. It’s defied broker expectations for at least the last 12-months, so why should anything change now?
*Consensus View rating is calculated by assigning a value of 1 to any rating better than neutral, 0 to a neutral rating, and -1 to any rating worse than neutral. The average of the numerical ratings is calculated and a value of 0.5 or greater is considered a consensus BUY/OUTPERFORM/OVERWEIGHT rating, a value of less than -0.5 is considered a consensus SELL/UNDERPERFORM/UNDERWEIGHT rating, and a value in between is considered a consensus NEUTRAL/HOLD/EQUAL-WEIGHT rating.
This article first appeared on Market Index on 27 February 2024.
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