Although the Fortescue Metals Group Ltd (ASX: FMG) share price has pulled back meaningfully from recent highs, one leading broker believes there could be more declines to come.
In response to the miner's recent quarterly update, Goldman Sachs has reiterated its sell rating with a $15.80 price target.
Based on the current Fortescue share price of $20.86, this suggests potential downside of almost 25% for investors over the next 12 months.
What did the broker say about the Fortescue and its share price?
Firstly, Goldman was actually reasonably pleased with the iron ore miner's performance during the third quarter. It highlights that its production was in-line and its costs were better than expected. It said:
FMG reported a strong March Q with record iron ore shipments of 46.3Mt (in-line with GSe), and unit costs 2% below and price realisations 2% above our estimates. FY23 shipments guidance is unchanged at 187-192Mt (GSe 192Mt) and costs are tracking to the bottom end of the US$18-18.75/wmt range (GSe at US$18.1/wmt) due to higher volumes and lower diesel prices.
Together with higher forecast iron ore prices, this has led to the broker lifting its earnings per share estimates by 4% in FY 2023 and 2% in FY 2024.
Why is it still bearish?
Unfortunately, the company's quarterly performance wasn't enough for a more positive rating. Goldman continues to believe that the Fortescue share price is vastly overvalued at the current level compared to peers. It commented:
[T]he stock is trading at a premium to RIO & BHP on our estimates; 1.4x NAV vs. BHP at c. 0.95x NAV and RIO at 0.9x NAV, c. 5.5x NTM EV/EBITDA (vs. BHP/RIO on c. 5x/3.5x), and FY24 FCF of c. 4% vs. BHP/RIO on c. 7/10%.
In addition, the broker has concerns over its Fortescue Future Industries business and expects it to weigh heavily on its free cash flow and dividends. It said:
The 2022 FMG site trip to the Pilbara highlighted ongoing elevated spend to maintain hematite group shipments at ~190Mtpa going forward. Combined with the ~US$7-8bn decarb program, we forecast FMG's capex to increase from ~US$3.3bn in FY23 to US$3.8bn by FY25. We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious strategy, we assume the company raises ~US$5.5bn of new debt, reduces the dividend payout ratio from the current ~65% in 1H FY23 to ~50% from FY24 onwards (bottom end of the 50-80% guidance range), and increases gross gearing to ~30% by FY26 (in-line with the company's target of 30-40%).