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Fortescue Metals Group earnings preview: tough time ahead


MongiIG

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Fortescue Metals Group (ASX: FMG) will report its FY23 Half Year Financial Results on 15 February, 2023. What to expect for the ASX mining star? For investors, will Fortescue’s massive dividends keep coming?

BG_iron_ore_mining.jpgSource: Bloomberg
 

Hebe Chen | Market Analyst, Melbourne | Publication date: Friday 10 February 2023 

Fortescue Metals Group earnings expectation

Operation performance

FMG’s profitability is poising a downhill trend for the years to come. The combination of a lowering average revenue (approximately 13% decline in FY23) and surging costs (about 15% higher) will continue to deteriorate its cash-making capability. Hence, it’s certainly not too pessimistic to expect FMG will go through a tough phase before regaining its growth momentum; the average earnings growth rate for the FY23 could be the slowest since 2018.

 

  FY22 FY23 (estimate) Q1 FY23
Average revenue US$100/dmt US$87/dmt US$87/dmt
C1 Cost US$15.91/wmt $18-$18.75/wmt US$17.69/wmt
Iron ore shipment 189mt 187-192mt 47.5mt
EPS US$2.01 (AUD$2.77) AUD$2.07 AUD $2.2

Source: FMG

FMGearningsforecast.pngSource: FMG

Long-term outlook

The good news is that the company’s long-term strategy to focus on green energy development, as well as its enviable balance sheet, should be able to offer enough confidence for the patient shareholders. Fortescue Future Industries (FFI), FMG’s green hydrogen division, has made remarkable development last year as a global leader in green energy and is committed to producing zero-carbon green hydrogen, which could be the next gold mine for the company. Meanwhile, the company’s free cash flow had improved substantially during the past three years (from US$2B in 2019 to US$4B in 2022), which ensures the company’s future energy development will be able to progress even in the face of multiple headwinds.

China reopening impact

While China’s reopening and the improved AU-China relationship seemly bode well for the resources with iron ore being one of the biggest beneficiaries, it’s too early to be over-optimistic about the recovery journey. On the one hand, China’s reopening economy so far is more focused on the consumption areas with little information about major infrastructure boost. In addition, China’s property turmoil is still fermenting with a cloudy mid-term outlook, and the signs of a shrinking population contributing to a worse long-term outlook. In light of this, its demand for the construction resources is unlikely to return to its peak level without a miracle.

Fortescue Metals Group Share price

The lower valuation (P/E at approximately 10x) and its well-known juicy dividend yield are the two primary reasons investors fell in love with FMG’s stocks. However, based on the previous payout ratio (75%) and the estimated EPS for FY23, the dividend payout may take a 25-50% cut but comes with a less attractive valuation.

From a technical point of view, after rising 50% in three months, the price of FMG has pulled back from the yearly-high level at $22.95 and breached the months-long trendline. Current support sits around $21.63. Further slip from this level could open the floor to the 50-day MA at around $21. Meanwhile, strong resistance can be found from the 20-day moving average. Once cleared, the price is ready to challenge the year-high again.

FMGshareprice.jpg

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