Fortescue Metals Group Ltd (FMG)

Transcription

1 3 March 2017 Analyst David Coates Authorisation Peter Arden Fortescue Metals Group Ltd (FMG) All about the iron ore price Recommendation Sell (unchanged) Price $6.62 Target (12 months) $5.75 (previously $3.80) Expected Return Capital growth -13.1% Dividend yield 7.3% Total expected return -5.9% Company Data & Ratios Enterprise value Market cap $25,867m $20,613m Issued capital 3,114m Free float 52% Avg. daily val. (52wk) $ month price range $2.29-$7.27 GICS sector Price Performance Materials (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Strong performance, dividend up FMG announced its 1HFY17 financial results, which were comfortably ahead of our estimates on account of the dramatic rise in the iron ore price compared to our forecast. As such, FMG reported Net Revenues of US$4,492m (vs BPe US$3,525m). While costs, D&A and interest charges were in-line with our estimates, the higher revenues flowed down to EBITDA of US$2,602m (vs BPe US$1,730m), EBIT of US$1,980m (vs BPe US$1,130m) and NPAT of US$1,222m (vs BPe US$743m). This also enabled a strong dividend of A20cps (fully franked) to be declared, equating to a payout ratio of 38%, up against the overall payout ratio for FY16 of 35% and ahead of our A10cps (fully franked) forecast. As at 31 Dec 16 FMG held cash of US$1,160m and gross debt of US$5,156m for net debt of US$4.0 billion. This followed debt repayments during the period of US$1.7 billion. FY17 guidance remains unchanged for Mt ore shipped at C1 cash costs of US$12-13/wmt. Making the most of an iron ore price windfall FMG certainly didn t fiddle while Rome was burning in 2015 when the iron ore price cratered. The unrelenting focus on cost reduction during that time has positioned FMG to generate free-cash-flows that nearly tripled over FY16 vs FY15 and in 1HFY17 have increased a further 59% on the pcp. During 1HFY17 further debt repayments of US$1,700m were made lowering net gearing to 30% and gross gearing to 36%. Investment thesis Sell (unch.), TP$5.75 (from $3.80) FMG continues to deliver on production guidance and impressive cost reductions. The operations haven t missed a beat in the last two years while this has been a focus. However, we remain of the view that much of this is priced in, together with the ongoing de-leveraging (we forecast FMG to be net cash in 1HFY19) and that FMG is being driven by the iron ore price rather than company specific catalysts. With the risk remaining to the downside for the iron ore price, we retain our sell recommendation, notwithstanding our NPV-based valuation increasing 52% to $5.75/sh. Absolute Price $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 Mar Jul 15 Nov SOURCE: IRESS FMG Mar 16 Jul 16 Nov 16 S&P 300 Rebased Earnings Forecast Year ending 30 Jun 2016a 2017e 2018e 2019e Sales (US$m) 7,083 9,346 8,247 7,768 EBITDA (US$m) 3,059 5,594 4,329 3,819 NPAT (reported) (US$m) 985 2,868 2,178 1,896 NPAT (adjusted) (US$m) 985 2,868 2,178 1,896 EPS (adjusted) (UScps) EPS growth (%) 212% 191% -24% -13% EPS (adjusted) (Acps) PER (x) EV/EBITDA (x) Dividend (Acps) Yield (%) 2% 7% 5% 4% Franking (%) 100% 100% 100% 100% ROE (%) 12% 27% 18% 14% SOURCE: BELL POTTER SECURITIES ESTIMATES BELL POTTER SECURITIES LIMITED ACN AFSL DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 7 THAT FORM PART OF IT. Page 1

2 1HFY17 financial result Table 1 - FMG 1HFY17 financial result summary Key takeaways from the result FMG announced its 1HFY17 financial results, which were comfortably ahead of our estimates on account of the dramatic rise in the iron ore price against our price forecast. As such, FMG reported Net Revenues of US$4,492m (vs BPe US$3,525m). While costs, D&A and interest charges were in-line with our estimates, the higher revenues flowed down to EBITDA of US$2,602m (vs BPe US$1,730m), EBIT of US$1,980m (vs BPe US$1,130m) and NPAT of US$1,222m (vs BPe US$743m). This also enabled a strong dividend of A20cps (fully franked) to be declared, equating to a payout ratio of 38%, up against the overall payout ratio for FY16 of 35% and ahead of our A10cps (fully franked) forecast. As at 31 Dec 16 FMG held cash of US$1,160m and gross debt of US$5,156m for net debt of US$4.0 billion. This followed debt repayments during the period of US$1.7 billion. FY17 guidance remains unchanged for Mt ore shipped at C1 cash costs of US$12-13/wmt. Period Dec-15 Jun-16 Jun-16 Dec-16 Dec-16 Variance Variance Half / Full / BP Est HY(a) HY(a) FY(a) HY(a) HY (BPe) Vs pcp Vs FY(BPe) Revenue US$m 3,344 3,739 7,083 4,492 3,525 34% 27% EBITDA US$m 1,301 1,758 3,059 2,602 1, % 50% EBIT US$m 568 1,247 1,815 1,980 1, % 75% NPAT US$m , % 65% Dividend A$/sh % 100% Cash balance US$m 2,318 1,583 1,583 1,160 2,098-50% -45% Net debt US$m 6,130 5,188 5,188 3,996 4,580-35% -13% FMG ore shipped Mt (wet) % 2% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Other key takeaways from the result include: CAPEX will start to increase as sustaining capital starts to increase towards long-run levels and renewal of mining fleets begins to commence. Construction of the Very Large Ore Carriers (VLOC s) has also had an impact; Free-cash-flows continue to grow strongly, having nearly tripled over FY16 vs FY15 and in 1HFY17 have increased a further 59% on the pcp; Over 1HFY17 the 62% benchmark iron ore price increased 27%, being the key driver of increased revenues for FMG and contributed 76% (US$1,016m) of the rise in underlying EBITDA vs the pcp; Iron ore prepayments were US$797m at 31 December 2016, scheduled to be amortised by US$350 million in FY18 and US$447 million in FY19; and Safety performance continues to improve, with the Total Reportable Injury Frequency Rate (TRIFR), falling 33% to 3.2 compared to the pcp. Page 2

3 Changes to our forecasts Beyond updating our forecasts for the 1HFY17 financial result we make the following changes to our modelling assumptions: Update for our latest iron ore price forecasts, which include material mark-to-market upgrades; Increase our medium term production forecasts in line with management commentary that incremental productivity gains would continue to lift production volumes; Increase our FY17 CAPEX forecasts in-line with management guidance of US$360m on ore carriers and tugs plus US$80m on exploration and development; Removed the reduced iron ore price discount we had forecast to commence in CY17 to reflect a possible blending deal with Vale. With no news on this and we have removed it from our forecasts; and Increase our near term dividend payout forecast to meet the top end of a guided 30%- 40% payout ratio. The net impact to our production and earnings estimates are summarised below. Table 2 - Changes to earnings estimates Previous New Change Year ending June 30 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Iron ore (Fines) 62% Fe % 7% 0% AUD/USD % 0% 0% Total production (Mt wet) % 2% 4% Costs C1 (US$/t) % 0% 0% Revenue (US$m) 7,154 7,395 7,469 9,346 8,247 7,768 31% 12% 4% EBITDA (US$m) 3,587 3,635 3,355 5,594 4,329 3,819 56% 19% 14% NPAT (adjusted) (US$m) 1,610 1,727 1,623 2,868 2,178 1,896 78% 26% 17% Adjusted EPS (Ac/sh) % 26% 17% PER (x) (4.1) (1.9) (1.4) DPS (Ac/sh) % 83% 8% Yield (%) 4% 3% 4% 7% 5% 4% 4% 2% 0% Net debt (cash) ($m) 3,669 1, , (1,590) -38% -80% -1655% ND / (ND + E) (%) 28% 15% 1% 18% 3% -13% -10% -12% -14% Valuation ($/sh) % 52% 55% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Our changes have led to significant near term earnings upgrades, primarily on the higher iron ore price assumptions and the modelling of a steadily increasing production profile. In FY17 a 30% increase to our assumed iron ore price (the bulk of which is due to mark-tomarket) is the main driver of a 78% increase to our earnings estimate, from US$1.6 billion to US$2.9 billion. In FY18 and FY19 earnings are upgraded 26% and 17% respectively. Upcoming catalysts Key near term catalysts for FMG include: Ongoing productivity and efficiency gains; Continued debt reduction and balance sheet improvement; CAPEX set to increase, ore carriers commencing service CY17; March 2017 production report; and Potential dividend increases. Page 3

4 Fortescue Metals Group Ltd (FMG) Company description: Iron ore major in the Pilbara, WA FMG is an independent iron ore producer in the Pilbara region of Western Australia. The company is currently achieving its targeted +165Mtpa production rate, following several years of development and expansion. There is potential for expansions beyond these rates, through optimising existing assets. The company s prime focus however has shifted to reducing its debt and achieving gross gearing levels of <40%. Investment thesis Sell (unch.), TP$5.75 (from $3.80) While cost and operating performance will continue to be optimised, the pace of improvement is expected to slow and become more incremental an entirely reasonable outlook. As such, there are few changes to our assumptions: a downward tweak to our strip ratios (for slightly lower mining costs) offset by a technical reduction in Ore Reserves and our NPV-based valuation is essentially unchanged. Earnings increase by 8% in FY17 and FY18 on the lower costs and our dividend forecast for FY17 increases to A24cps, from A14cps. We retain our sell recommendation. Valuation: $5.75/sh Our FMG valuation incorporates DCF models of FMG s Chichester and Solomon production hubs, a multiple valuation estimate of the Nyidinghu deposit, an estimate of exploration/expansion upside and an estimate of corporate overhead costs. Risks Risks to resources sector equities include, but are not limited to: - Commodity price and exchange rate fluctuations. The future earnings and valuations of exploration, development and operating resources companies are subject to fluctuations in underlying commodity prices and foreign currency exchange rates. - Infrastructure access. Bulk commodity producers are particularly reliant upon access to transport infrastructure. Access to infrastructure is often subject to contractual agreements, permits, and capacity allocations. Agreements are typically long-term in nature (+10 years). Infrastructure can be subject to outages as a result of weather events or the actions of third party providers. - Operating and capital cost fluctuations. Markets for exploration, development and mining inputs can fluctuate widely and cause significant differences between planned and actual operating and capital costs. Key operating costs are linked to energy and labour costs. - Resource growth and mine life extensions. Future earnings forecasts and valuations may rely upon resource and reserve growth to extend mine lives. - Sovereign risks. Mining companies assets can be located in countries other than Australia and are subject to the sovereign risks of that country. - Regulatory changes risks. Changes to the regulation of infrastructure and taxation (among other things) can impact the earnings and valuation of mining companies. - Operating and development risks. Mining companies assets are subject to risks associated with their operation and development. Risks for each company can be heightened depending on method of operation (e.g. underground versus open pit Page 4

5 mining) or whether it is a single operation company. Development assets can be subject to approvals timelines or weather events, causing delays to commissioning and commercial production. - Funding and capital management risks. Funding and capital management risks can include access to debt and equity finance, maintaining covenants on debt finance, managing dividend payments, and managing debt repayments. - Corporate/M&A risks. Risks associated with M&A activity including differences between the entity s and the market s perception of value associated with completed transactions. Page 5

6 Fortescue Metals Group Ltd Fortescue Metals Group Ltd (FMG) 3 March 2017 as at 3 March 2017 Recommendation Sell Price $6.62 Target (12 months) $5.75 Table 3 - Financial summary PROFIT AND LOSS FINANCIAL RATIOS Year ending 30 Jun Unit 2015a 2016a 2017e 2018e 2019e Year ending 30 Jun Unit 2015a 2016a 2017e 2018e 2019e Revenue US$m 8,574 7,083 9,346 8,247 7,768 VALUATION Expense US$m (6,120) (4,024) (3,752) (3,918) (3,949) NPAT (adjusted) US$m ,868 2,178 1,896 EBITDA US$m 2,454 3,059 5,594 4,329 3,819 Adjusted EPS USc/sh Depreciation US$m (1,405) (1,244) (1,215) (1,176) (1,201) EPS growth % 212% 191% -24% -13% EBIT US$m 1,049 1,815 4,380 3,153 2,619 Adjusted EPS Ac/sh Net interest expense US$m (629) (461) (361) (128) 15 EPS growth % 257% 184% -24% -13% PBT US$m 420 1,354 4,019 3,025 2,634 PER x 54.4x 15.2x 5.4x 7.1x 8.2x Tax expense US$m (104) (369) (1,150) (847) (737) DPS Ac/sh NPAT (reported) US$m ,868 2,178 1,896 Franking % 100% 100% 100% 100% 100% Abnormal items US$m Yield % 1% 2% 7% 5% 4% NPAT (adjusted) US$m ,868 2,178 1,896 FCF/share USc/sh FCF/share Ac/sh PROFIT AND LOSS (INTERIM) FCF yield % 4% 14% 24% 17% 16% Half year ending Unit Jun-16a Dec-16a Jun-17e Dec-17e Jun-18e EV/EBITDA x 8.5x 6.9x 3.7x 4.8x 5.5x Revenue US$m 3,739 4,492 4,854 4,263 3,984 EBITDA margin % 29% 43% 60% 52% 49% Expense US$m (1,981) (1,890) (1,862) (1,969) (1,948) EBIT margin % 12% 26% 47% 38% 34% EBITDA US$m 1,758 2,602 2,992 2,293 2,036 Return on assets % 1% 5% 15% 11% 10% Depreciation US$m (511) (622) (593) (588) (588) Return on equity % 4% 12% 27% 18% 14% EBIT US$m 1,247 1,980 2,400 1,705 1,448 LIQUIDITY & LEVERAGE Net interest expense US$m (321) (248) (113) (76) (52) Net debt (cash) US$m 7,188 5,188 2, (1,590) PBT US$m 926 1,732 2,287 1,630 1,395 ND / E % 95% 62% 21% 3% -12% Tax expense US$m (260) (510) (640) (456) (391) ND / (ND + E) % 49% 38% 18% 3% -13% NPAT (reported) US$m 666 1,222 1,646 1,174 1,005 ND / EBITDA x 2.9x 1.7x 0.4x 0.1x -0.4x Abnormal items US$m EBITDA/Interest x (258.5) NPAT (adjusted) US$m 666 1,222 1,646 1,174 1,005 ASSUMPTIONS - Prices CASH FLOW Year ending 30 Jun Unit 2015a 2016a 2017e 2018e 2019e Year ending 30 Jun Unit 2015a 2016a 2017e 2018e 2019e Iron ore (Fines) 62% Fe US$/dmt OPERATING CASHFLOW AUD/USD US$/A$ Receipts US$m 8,537 6,693 9,420 8,307 7,781 Long term (real) assumptions: IO (fines) 62% US$60/t, AUS/USD US$0.75/A$ Payments US$m (5,971) (3,736) (3,852) (3,891) (3,950) Tax US$m (529) 66 (905) (847) (737) ASSUMPTIONS - Production Net interest US$m (605) (627) (323) (128) 15 Year ending 30 Jun Unit 2015a 2016a 2017e 2018e 2019e Other US$m Sales (FMG equity) Mwt Operating cash flow US$m 1,432 2,396 4,340 3,441 3,108 Third party Mwt INVESTING CASHFLOW Sales (total) Mwt Capex & exploration US$m (849) (360) (719) (740) (645) 62% Fe index price US$/dt Other US$m (1) - - FMG realised price CFR US$/dt Investing cash flow US$m (726) (336) (720) (740) (645) Realised price discount % -18% -10% -14% -15% -15% FINANCING CASHFLOW Costs C1 (excl. royalty) US$/wt Net equity proceeds US$m Shipping US$/wt Debt proceeds US$m 2, Royalties US$/wt Debt repayments US$m (2,367) (2,695) (2,709) (1,000) (1,176) Other US$/wt Dividends US$m (343) (114) (638) (793) (508) Cost of sales US$/wt Other US$m (126) (26) Interest US$/wt Financing cash flow US$m (630) (2,835) (3,322) (1,793) (1,684) Capex (sustaining from FY15) US$/wt Change in cash US$m 76 (775) Total all-in cost US$/wt Total all-in cost (@ 8% moist) US$/dt BALANCE SHEET Total all-in cost (62% Fe eq.) US$/dt Year ending 30 Jun Unit 2015a 2016a 2017e 2018e 2019e ASSETS VALUATION Cash & short term investments US$m 2,381 1,583 1,879 2,787 3,567 Issued capital Accounts receivable US$m Shares on issue m 3,114 Inventory US$m Options (in the money) m 11 Property, plant & equipment US$m 12,979 12,305 16,343 15,877 15,291 Total m 3,125 Exploration & evaluation US$m 4,750 4, Jun-17 Jun-18 Jun-19 Other US$m Sum of parts valuation A$m $/sh A$m $/sh A$m $/sh Total assets US$m 21,360 19,337 19,194 19,605 19,816 Iron ore operations (DCF) 23, , , LIABILITIES Exploration (estimate) 1, , Accounts payable US$m Corporate (DCF) (897) (0.29) (856) (0.27) (811) (0.26) Borrowings US$m 9,569 6,771 4,153 3,153 1,977 Total enterprise value 24, , , Other US$m 3,515 3,538 3,857 3,857 3,857 Total liabilities US$m 13,823 10,931 8,568 7,594 6,417 Net debt/(cash) 5, , SHAREHOLDER'S EQUITY Equity value 19, , , Share capital US$m 1,294 1,301 1,283 1,283 1,283 Reserves US$m MAJOR SHAREHOLDERS Retained earnings US$m 6,184 7,058 9,292 10,677 12,065 Minderoo Group Pty Ltd 33% Non-controlling interest US$m Hunan Valin Iron & Steel Group 15% Total equity US$m 7,537 8,406 10,626 12,011 13,399 Other 52% Net debt US$m 7,188 5,188 2, (1,590) Weighted average shares m 3,114 3,112 3,114 3,114 3,114 SOURCE: BELL POTTER SECURITIES ESTIMATES Page 6

7 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad Jonathon Higgins Title/Sector Head of Research Phone tslim shaddad jhiggins Hold: Expect total return between -5% Chris Savage csavage and 15% on a 12 month view Jonathan Snape jsnape Sell: Expect <-5% total return on a 12 month view Tim Piper John Hester Tanushree Jain Healthcare Healthcare/Biotech tpiper jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Financials TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Associates James Filius Banks/Regionals Diversified Resources Resources Associate Analyst tslim lsotiriou parden dcoates jfilius Such investments may carry an exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 7