Good Report Card

Ord Minnett Research Insight: Fortescue Metals Group (FMG)

Fortescue Metals Group reported a first-half FY21 underlying net profit of US$4.1bn, in line with Ord Minnett’s estimate. A fully franked interim dividend of $1.47 per share was declared, versus our $1.26 estimate. We make the following observations:

• Underlying earnings of US$4.1bn were pre-reported, as was net debt of US$0.1bn. The key unknown was the dividend, which came in at $1.47ps for the half based on an 80% payout ratio.
• The Iron Bridge magnetite project update wasn’t as bad as feared, with a US$400m capital expenditure overrun leading to a US$3bn revised budget (in line), and a six-month delay.
• On FY21 guidance, shipments have been revised up 2–3Mt to 178–182Mt, while costs have also increased due to a stronger Australian dollar and are now estimated at US$13.5–14/t.

Fortescue announced 10% of net profit would be used to fund renewable energy growth through the Fortescue Future Industries vehicle. This is the first information from the company about the scale of capital deployment into this initiative. First cab off the rank remains the green ammonia project in Tasmania, with final investment decision likely this calendar year, although there was no further detail on subsequent project options. In addition to the FFI, 10% of annual net profit will be directed to other resource growth opportunities, such as Iron Bridge. We found it reassuring that the annual commitment into these areas seems measured and won’t compromise the dividend in the near term.

Overall, it was another clean result from Fortescue. Our FY21 dividend forecast is at US$3.01ps (80% payout). We continue to see good value, based on a price to net present value multiple of 0.89x, and Fortescue’s dividend yield remains sector-leading, averaging 11% over next two years. We maintain our Buy recommendation with a $29.00 target price.