Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

Equity, Bottom-up Analyst

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

<ul>
<li>Over the last three years, <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> has paid shareholders 6.5 AUD/share of dividends, equivalent to 34% of today's share price. </li>
<li>
<a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> at a 130$/ton iron ore price implies a 12% dividend yield. China's recent easing measures to boost property give us confidence in iron ore prices.</li>
<li>Fortescue's strong net cash balance sheet position ( 2.6 bn USD ) provides a decent margin of safety. </li>
</ul>


Over the last three years, Fortescue Metals (FMG AU) has paid shareholders 6.5 AUD/share of dividends, equivalent to 34% of today's share price. 

Fortescue Metals (FMG AU) at a 130$/ton iron ore price implies a 12% dividend yield. China's recent easing measures to boost property give us confidence in iron ore prices.
Fortescue's strong net cash balance sheet position ( 2.6 bn USD ) provides a decent margin of safety. 


<p><a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> production reports and results are on the way. Given the strength in pricing, we forecast with the 62% Fe averaging 177$/ton for H2 2021; we see a 6.4 bn USD profit for H2 2021 and full-year profit over 10.5 bn USD. We also see them maintain an 85% payout ratio and distribute a dividend over 2.3 AUD/share, the full-year dividend almost representing a 15.5% yield. </p><p>As mentioned in my piece ( <a href="https://www.smartkarma.com/insights/core-correlations-14th-june-vale-shanxi-mine-closures-keep-iron-ore-prices-elevated-long-62" target="_blank" data-smartkarma-citation="insights:52950" rel="noopener">Core Correlations 14th June: Vale/ Shanxi Mine Closures Keep Iron Ore Prices Elevated. Long 62.</a> ), disruptions continue to provide a tailwind to pricing. We see a short-term upside of 15-20% on the stock into its production report and financial results.</p>

Fortescue Metals (FMG AU) production reports and results are on the way. Given the strength in pricing, we forecast with the 62% Fe averaging 177$/ton for H2 2021; we see a 6.4 bn USD profit for H2 2021 and full-year profit over 10.5 bn USD. We also see them maintain an 85% payout ratio and distribute a dividend over 2.3 AUD/share, the full-year dividend almost representing a 15.5% yield. As mentioned in my piece ( Core Correlations 14th June: Vale/ Shanxi Mine Closures Keep Iron Ore Prices Elevated. Long 62. ), disruptions continue to provide a tailwind to pricing. We see a short-term upside of 15-20% on the stock into its production report and financial results.

Fortescue: A Big Dividend Coming Your Way!

<p><a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> is a pure-play on iron prices. We believe that iron ore prices can sustain at or above 160-170$/ton in FY22. This implies solid cash flow generation for the company and potential dividend yield for investors. </p><p>At an iron ore price of 170$/ton, the implied free cash flow yield is 17%, and the dividend yield is 15% (with the assumption of a 70% payout ratio). We believe a hefty dividend payment is on its way for <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> shareholders, and there could be a short-term upside for the share price of 20-30% into that. </p>

Fortescue Metals (FMG AU) is a pure-play on iron prices. We believe that iron ore prices can sustain at or above 160-170$/ton in FY22. This implies solid cash flow generation for the company and potential dividend yield for investors. At an iron ore price of 170$/ton, the implied free cash flow yield is 17%, and the dividend yield is 15% (with the assumption of a 70% payout ratio). We believe a hefty dividend payment is on its way for Fortescue Metals (FMG AU) shareholders, and there could be a short-term upside for the share price of 20-30% into that. 

Fortescue: Iron Ore at $200/Ton, A Scenario Analysis

<p>With the recent correction in iron ore stocks due to the Tangshan steel production cuts negative sentiment, we believe better risk-reward has emerged in the name. Iron ore prices have retraced, and we believe that an attractive risk-reward is beginning to emerge for <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> once again. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/199/068/original/image?1617686026" class="editor-image img-responsive" data-smartkarma-image-id="199068"></figure><p><em>Source: SGX, Bloomberg</em></p><h3>Key thesis for investment in the company </h3><ul>
<li>
<strong>Attractive FCF yields and dividend yields at current spot prices:</strong> At the current spot price of 160$/ton, the FCF yield is close to 18%, and the dividend yield is 14%.  If prices were to decline to 120$/ton,  we would still see FCF yields of 10% and dividend yields of 9%.</li>
<li>
<strong>Chinese steel production growth continues to be strong despite Tangshan cuts. We forecast 10%</strong> steel production growth in March. The economy also reported strong numbers with a manufacturing PMI of 51.9 (Vs. Consensus estimates of 51.2). </li>
<li>
<strong>Risks on the supply of iron ore from Brazil could emerge</strong> as the Covid impact worsens.</li>
</ul><h3>Key Risks</h3><ul>
<li> <strong>China Tightening: </strong>A scenario could arise where China tightens the economy. This will be visible in the credit-balance growth slowing and the TSF coming down given last year was a high base in March. Consensus expectations for TSF are 3.8 trillion RMB for March ( Vs. 5.2 trillion RMB in March 2020). A lower number than 3.8 trillion could impact the market sentiment and send the iron ore price lower.</li>
<li>
<strong>Production cuts like the ones in Tangshan</strong> extending into other regions.</li>
</ul>

With the recent correction in iron ore stocks due to the Tangshan steel production cuts negative sentiment, we believe better risk-reward has emerged in the name. Iron ore prices have retraced, and we believe that an attractive risk-reward is beginning to emerge for Fortescue Metals (FMG AU) once again. Source: SGX, BloombergKey thesis for investment in the company 

Attractive FCF yields and dividend yields at current spot prices: At the current spot price of 160$/ton, the FCF yield is close to 18%, and the dividend yield is 14%.  If prices were to decline to 120$/ton,  we would still see FCF yields of 10% and dividend yields of 9%.

Chinese steel production growth continues to be strong despite Tangshan cuts. We forecast 10% steel production growth in March. The economy also reported strong numbers with a manufacturing PMI of 51.9 (Vs. Consensus estimates of 51.2). 

Risks on the supply of iron ore from Brazil could emerge as the Covid impact worsens.
Key Risks
 China Tightening: A scenario could arise where China tightens the economy. This will be visible in the credit-balance growth slowing and the TSF coming down given last year was a high base in March. Consensus expectations for TSF are 3.8 trillion RMB for March ( Vs. 5.2 trillion RMB in March 2020). A lower number than 3.8 trillion could impact the market sentiment and send the iron ore price lower.

Production cuts like the ones in Tangshan extending into other regions.


Fortescue Short-Term Better Risk Reward Emerging

<p>After having gone ex-dividend, <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> now presents a short-term opportunity. Last month due to its strong results, it declared a fully franked interim dividend of $1.47 per share, up a massive 93.4% on the prior corresponding period. Based on the Fortescue share price at Friday’s close, this interim dividend represents a 6% yield. </p><p>We think Fortescue presents an opportunity for a quick trade, given that iron ore prices are likely to hold for the short-term due to:</p><ul>
<li>Supply Issues out of Australia.</li>
<li>Mill Margins in China inflecting into positive territory.</li>
<li>Steel production levels are recovering in countries ex-China, for example, India and Brazil.</li>
</ul><p>With iron ore prices hovering at 160$-170$/ton, Fortescue can potentially achieve free cash flows of 16-18% and dividend yields of 13-14%, assuming 60% payout ratios.</p><table class="table table-striped">
<colgroup>
<col>
<col>
<col>
<col>
</colgroup>
<tbody>
<tr>
<td style="width: 42pt;">Ore Px USD/ton</td>
<td style="width: 50pt;">Div Yield (%)</td>
<td style="width: 57pt;">FCF Yield (%)</td>
<td style="width: 44pt;">EV-EBITDA</td>
</tr>
<tr>
<td>60</td>
<td>2%</td>
<td>-1%</td>
<td>22.0</td>
</tr>
<tr>
<td>70</td>
<td>3%</td>
<td>1%</td>
<td>16.7</td>
</tr>
<tr>
<td>80</td>
<td>4%</td>
<td>3%</td>
<td>13.4</td>
</tr>
<tr>
<td>90</td>
<td>5%</td>
<td>4%</td>
<td>11.2</td>
</tr>
<tr>
<td>100</td>
<td>6%</td>
<td>6%</td>
<td>9.6</td>
</tr>
<tr>
<td>110</td>
<td>7%</td>
<td>8%</td>
<td>8.4</td>
</tr>
<tr>
<td>120</td>
<td>8%</td>
<td>10%</td>
<td>7.5</td>
</tr>
<tr>
<td>130</td>
<td>9%</td>
<td>11%</td>
<td>6.7</td>
</tr>
<tr>
<td>140</td>
<td>10%</td>
<td>13%</td>
<td>6.1</td>
</tr>
<tr>
<td>150</td>
<td>11%</td>
<td>15%</td>
<td>5.6</td>
</tr>
<tr>
<td>160</td>
<td>13%</td>
<td>16%</td>
<td>5.1</td>
</tr>
<tr>
<td>170</td>
<td>14%</td>
<td>18%</td>
<td>4.8</td>
</tr>
</tbody>
</table><p><em>Source: Company filings, internal estimates</em></p>

After having gone ex-dividend, Fortescue Metals (FMG AU) now presents a short-term opportunity. Last month due to its strong results, it declared a fully franked interim dividend of $1.47 per share, up a massive 93.4% on the prior corresponding period. Based on the Fortescue share price at Friday’s close, this interim dividend represents a 6% yield. We think Fortescue presents an opportunity for a quick trade, given that iron ore prices are likely to hold for the short-term due to:
Supply Issues out of Australia.
Mill Margins in China inflecting into positive territory.
Steel production levels are recovering in countries ex-China, for example, India and Brazil.
With iron ore prices hovering at 160$-170$/ton, Fortescue can potentially achieve free cash flows of 16-18% and dividend yields of 13-14%, assuming 60% payout ratios.








Ore Px USD/ton
Div Yield (%)
FCF Yield (%)
EV-EBITDA


60
2%
-1%
22.0


70
3%
1%
16.7


80
4%
3%
13.4


90
5%
4%
11.2


100
6%
6%
9.6


110
7%
8%
8.4


120
8%
10%
7.5


130
9%
11%
6.7


140
10%
13%
6.1


150
11%
15%
5.6


160
13%
16%
5.1


170
14%
18%
4.8


Source: Company filings, internal estimates

Fortescue, Short-Term Upside After Going Ex-Dividend

Australia

Fortescue Metals Group Ltd. explores for and produces iron ore. The Company conducts business worldwide.

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Fortescue Metals (FMG AU)

Fortescue > 12% Dividend Yield Play

Fortescue Metals is a beneficiary of China loosening. It trades at a 6.8x PE with a 12% div yield, and a historical record of returning almost 34%...

Sameer Taneja

Fortescue: A Big Dividend Coming Your Way!

Strong H2 2021 profits for Fortescue of >6.4 bn USD with an annual dividend yield of 15% make it a good short-term pick into the results.

Sameer Taneja

Fortescue: Iron Ore at $200/Ton, A Scenario Analysis

Fortescue metals is a pure-play on iron ore. With iron ore prices set to breach 200$/ton and sustain at 160-170$/ton in the short-term, there is a...

Sameer Taneja

Fortescue Short-Term Better Risk Reward Emerging

Fortescue is an attractive risk-reward opportunity with an 18% FCF yield and 14% dividend yield based on current spot prices, with a good margin of...

Sameer Taneja

Fortescue, Short-Term Upside After Going Ex-Dividend

We highlight an opportunity to trade Fortescue which at the current iron ore spot price has a 17% Free Cash Flow Yield and 14% dividend yield. We...

Sameer Taneja

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