Iron ore price, page-15729

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robert23

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116

24/08/19

12:39

Post #: 40133057
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Originally posted by Big Short: ↑

I was just reading Goldman Sachs research on my Commsec account.

They have a buy recommendation on FMG & Rio (not BHP) and FMG target price of $9.80 (research release date 13 August 2019).

"Upgrading iron ore, Buy RIO and FMG:We think iron ore will rebound to US$110-115/t in 4Q post Chinese Golden week and recommend investors buy RIO and FMG post the recent share price weakness."

"We increase our FMG NAV to A$7.73/sh and TP to A$9.8/sh (set at 50:50 NAV:3.5x EBITDA NTM) and upgrade to Buy on valuation (0.9x NAV) and an attractive FCF yield of 13% in FY20 despite higher capex and cash tax."

They have following graph re forward estimates and earnings per share.

I am interested by the EPS on right of graph. If EPS plays out as predicted, then consider the following simple analysis.

You buy FMG share today for $7.50 - your payback in year 1 is $1.50 (whether in dividends or profit retention which improves the balance sheet). Therefore after year 1, your cost of FMG share has effectively been reduced to $6. In year 2, EPS is predicted at 70 cents per share and on your "reduced" $6 cost base, the stock is now trading on PE ratio of 8.57 ($6 divided by 70 cents), even in a more normal IO pricing year (if we consider 2020 as an abnormal year).

Therefore, my conclusion based on fundamentals, you can't go wrong buying FMG at current price of $7.50. Remember, Goldman Sachs has net asset values at $7.73.

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I read the GS report you are talking about and thought it was an outstanding effort, particularly page 18, Exhibit 35.

I think you have used an AUD cost base against USD EPS.

Think if you rework using EPS in AUD a better outcome will appear.

Look forward to your comments big short.

This could be the best buy on fundamentals on the market.

robbie23

FMG Price at posting: $7.57 Sentiment: Buy Disclosure: Held
6 Upvote

0 Great analysis

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