A bit more background to how Twiggy dealt with MS. FMG combats...

A bit more background to how Twiggy dealt with MS.
FMG combats Morgan Stanley sell note with $500m buyback as Wall St slump makes good news rare
11th October 2018
Tim Treadgold
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The sharp increase in US interest rates, coupled with trade war fears, triggered a whiff of panic in financial markets this week, but through the smoke some cool heads saw buying opportunities, led in Australia by iron ore entrepreneur, Andrew Forrest.

While not directly buying more shares in Fortescue Metals Group, the company he chairs and controls with a 30% stake, Forrest is already a big beneficiary of a proposed $500 million FMG share buy-back.

Within minutes of the buy-back announcement FMG’s share price rose by 18c (or 5%) to $3.76, a move which clawed back some recently lost ground and which added an extra $150 million to the paper-value of Forrest’s FMG stake, assuming he doesn’t participate in the buy-back.

The rise in FMG’s share price means the buyback announcement has achieved one of its objectives, to put a floor under the company’s stock, which has sunk by 31% from its January peak of $5.35, with the fall largely a result of its lower-grade iron ore being sold at a discount.

Whether Forrest accepts the buy-back offer for some of his shares is largely irrelevant for a man with a fortune valued at around $4 billion.

The more important signal for FMG investors, and the wider stock market, is that he believes FMG has the spare cash to flip from debt reduction to increased shareholder rewards and that buying FMG shares now is a good investment.

But there could be another factor at work in the share-price boosting buy-back and that’s annoyance with a critical analysis of Fortescue two weeks ago by the influential US investment bank, Morgan Stanley.

The bank’s FMG report was unusual for two reasons. It was an “initiation” analysis from Morgan Stanley, which has not previously researched the stock, and it came with a sell recommendation, which is odd advice on a previously unresearched company – a way of saying “why bother” to clients who probably don’t own the stock anyway.

Under the headline “Between steel and a hard place. Initiating at underweight” the bank’s report was written at a time when FMG was trading at $3.95 whereas Morgan Stanley saw a price target of $3.30, which will be a two-year low if it drops that far.

Morgan Stanley’s case for saying sell FMG is based on research by its China materials analyst who reckons the heavy iron ore price discounting being suffered by FMG “is likely to continue at levels lower than consensus over the 2019 to 2021 finance years, leading to negative earnings revisions”.

Not everyone agrees. J.P. Morgan yesterday repeated a buy recommendation on FMG, noting that “achieved (iron ore) prices have rallied by 20% since July while the stock has fallen by 15%”. Ord Minnett had an accumulate tip and a price target of $5.40.

However, where the FMG v Morgan Stanley situation looks particularly interesting (if indeed it is a situation) is as a comparison with what’s happening in the US where the entrepreneurial car maker, Tesla, has been battling short-sellers with its outgoing chairman, Elon Musk, running foul of the US financial markets authority with some of his tweeted communications.

FMG is not in the same league as Tesla but short-sellers have been increasing their position over the past two months with the short-tracking website, www.shortman.com, noting that a the short position in FMG has risen from 1.45% of its issued capital on August 28 to a latest reading (October 5) at 2.25%, which is up modestly, but broadly in line with the last two years of short positions.

In principal, Tesla and FMG are on common ground in that they are relatively new companies blazing a trail in a business sector dominated by entrenched giants and are being hit on the stock market by short sellers or banks telling clients that the stock is a sell.

FMG, obviously, was not the only newsworthy event on the market in a week when investors struggled to find fair value under the double-barrelled uncertainty of US interest rates reaching what some critics call a tipping point (when bonds become more attractive than shares, triggering a share sell-off) and the US and China throwing more punches in their slugfest.