Fortescue Metals Group: Yield drifts lower
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 17 February 2022, 9:30 AM
- Sectors Covered:
- Mining, Energy
- Fortescue Metals Group (ASX:FMG) posted a lower 1H22 result that was close to expectations, with EBITDA of US$4.8bn (-51% vs 2H21) and NPAT of US$2,777m (-55% vs 2H21).
- FMG’s interim dividend retreated with falling earnings at A$0.86 (-59% vs 2H21).
- Declining iron ore prices, increasing low-grade discounts, and severe cost headwinds set up a difficult outlook for FMG vs the last 12 months.
- No change to FY22 guidance for production, unit costs and capex. We maintain a Hold rating with a revised (login to view) target price.
EBITDA was close to estimates at US$4.8bn (vs consensus US$4.7bn vs MorgE US$4.9bn) down 51% on the previous half. Underlying NPAT of US$2,777m was 2% ahead (vs consensus US$2,703m vs MorgE US$2,610m) down 59% on the previous half.
FMG’s dividend fell more than its earnings, with the miner also cutting its dividend payout ratio from 80% to 70%. This saw an interim dividend of A$0.86ps (vs consensus A$0.86 vs MorgE A$0.93ps).
No change to FY22 production, unit cost or capex guidance. While it did not get a mention in the presentation deck, FMG management did speak at length during the briefing about the difficult environment in WA around costs, labour and services.
At this stage also no changes to Iron Bridge schedule or budget, FMG’s development magnetite project.
FMG continues to pursue a diversified portfolio of ESG-related projects through its Fortescue Future Industries (FFI) subsidiary. While FMG is putting aside a significant 10% of NPAT for spend on FFI, the current pace of investment is slow.
It is still impossible to accurately value FMG’s initial push into FFI given the early stage of projects/prospects being considered, and little detail that has been made known. Although we expect further details on specific projects will not be far away given FMG will have to start sanctioning projects soon if it hopes to achieve its ambitious target of completely decarbonising iron ore business by 2030.
For FMG’s core iron ore business, 2H22 will prove a critical half for the company. In addition to uncertainty around the direction of iron ore prices and discounts, FMG is also battling inflationary pressures around its capex and opex.
Forecast and valuation update
We have updated our estimate for the result. And increased our 2H22 expense assumptions, including lifting C1 to the top end of FY22 guidance at US$15.50/wmt.
We have also trimmed forward payout assumptions to 70% (from 75%), dragging on our forward dividend assumptions.
FMG’s share price has performed well since bottoming in November 2021. Although its current valuation combined with the lower (but still healthy) earnings and dividend profile, leave us with the view that FMG is fair value on a TSR basis.
Post changes to our forecasts we have reduced our target price to (login to view).
Going ex-dividend. There is once again a risk that FMG’s share price does not ‘carry’ its dividend.
3Q22 update on C1 costs and Iron Bridge budget/schedule.
FID on FFI projects.
Potential weakness in Chinese steel activity.
Execution risk around FMG’s aggressive pace of investment in FFI.
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