half yearly results, page-7

I received the Morgan Stanley research scoop on Monday with an interesting view on FMG. I say interesting as this is the first time in my memory I can recall the brokers at MS being overly bullish.

Some Key points:

Might FMG Miss Guidance – And Does it Matter? - As we see it, the answers are, ‘yes’ to the former, and ‘no’to the latter. Any production shortfall on the 127Mt target will have minimal valuation impact.

Costs rather than production the important change: More focus on confirmation the 155Mtpa nameplate target hasn't slipped from past the end of March. The lower unit cost guidance, US$34/t from US$36/t, offsets the $0.2b overshoot; the net implied EBITDA impact is only 1%. And the lower costs could carry to forward periods.

FMG ends FY14 with 54% gearing but this reduces to 40% in FY15, and with cash building to +US$2.5bn through FY15 we expect further debt reduction can occur. All this while increasing the dividend payout ratio to 30% in FY14 and 35% in FY15 (MSe) to deliver a 7-8% dividend yield.

The discount FMG trades at compared to BHP and RIO seems unwarranted; EV/EBITDA ratios are 50% lower even though EBITDA margins are comparable and Return on Equity, Free Cash Flow yield and dividend yield are all stronger.

FMG is top pick in the large cap mining sector.

Target Price $7.80

EPS (AUD/share) – 133 (14FY), 130 (15FY), 122 (16FY)