Fortescue reported FY19 operating earnings of US$6.0bn and a net profit of US$3.2bn, both 5% ahead of consensus and in line with Ord Minnett’s forecasts. The company topped up its pre-declared dividend by 24cps, which was in line with market forecasts but 4c higher than our estimate. This took the payout ratio to 78%, at the top end of the 50–80% dividend policy range.
We make the following observations:
Net debt (which was pre-reported) fell to US$2.1bn in FY19 from US$3.1m in FY18.
Capital expenditure ticked up to US1,040m from US$890m a year ago, due to construction of the Eliwana mine.
A catch-up tax payment of US$670m is due in the December quarter, which was broadly in line with our forecast.
FY20 production guidance of 170–175Mt of iron ore shipped, at a cost of US$13.50/t, remained unchanged.
FY20 capital expenditure guidance of US$2.4bn was also unchanged and includes US$700m for the Eliwana mine (total project cost is US$2.35bn). The project is on track for first ore on train in December 2020. Fortescue’s share of Iron Bridge spending will also ramp up to US$500m in FY20, with bulk earthworks commencing later this calendar year.
Fortescue offers sector-leading valuation metrics, with the stock trading on an enterprise value to operating earnings multiple of 3x, along with dividend yields well in excess of 10% over the medium term. We acknowledge there will be some investor caution towards the stock given the uncertain macro-economic environment. However, the recent sell-off in the share price appears overdone to us, with the valuation metrics looking attractive enough to tolerate the macro risks.
We maintain our Buy recommendation, although we have trimmed our target price to $9.70 from $9.80.