Bell Potter tips the Fortescue (ASX: FMG) share price to go lower 

Bell Potter tips the Fortescue (ASX: FMG) share price to go lower despite the miner's record earnings and dividend yield.

Fortescue Metals Group Limited (ASX: FMG) has had a blockbuster year thanks to surging iron ore prices. The Fortescue share price's rapid appreciation ranks it as one of the best performing ASX 200 shares. Not only that, but its significant cash flow has also translated to a generous, market-leading dividend yield of 12.1%. 

Despite the standout performance and continuation of higher iron ore prices, analysts at Bell Potter have lowered their Fortescue share price targets with a hold rating. 

Toppled chess piece on top of pile of coins

Image source: Getty Images

Record half-year performance 

Fortescue delivered a record-breaking result for the six months ended 31 December. The company had a 44% increase in revenue to US$9,335 million and a 66% lift in net profit after tax to US$4,084 million.

As the financial performance was largely in-line with Bell Potter's expectations, the broker shifted focus to the progress update for Iron Bridge and the outlook for Fortescue Future Industries (FFI).

The broker noted that the resignations of COO Greg Lilleyman and other key personnel were triggered by a lapse in values, specifically communication. This related to a 15% CAPEX increase (from US$2.6 billion to US$3.0 billion) and scheduled production delay (from mid-CY22 to 2HCY22) at Iron Bridge. 

The resignations saw the Fortescue share price sink 3% lower last Tuesday. Bell Potter described the situation as a "dent in Fortescue's excellent track record of project delivery" that added uncertainty to the project's final costs and timing. However, it also believes the technical risks are well understood and shouldn't pose a threat to the project's completion. 

Fortescue Future Industries 

Fortescue Future Industries was established late last year with the hopes to deliver high-quality green hydrogen and green ammonia from projects across the globe.

In Fortescue's HY21 results, guidance cited that up to 10% of NPAT could be made available for FFI to invest in renewable energy and green hydrogen projects. Previous updates had indicated that ~US$90 million would cover FFI's assessment of project study and evaluation costs.

Based on Bell Potter's FY21 NPAT forecast of US$7.8 billion, this implies ~A$1 billion in potential investments into these projects – a much larger commitment than previously envisaged by the market. However, it was emphasised that any investments would have to compete through the company's capital allocation process and offer comparable returns.  

Fortescue share price target lowered with hold rating 

Fortescue's record first-half FY21 financial performance clearly reflects excellent operational performance, cost control and the strong iron ore market.

Bell Potter lifted its earnings for FY21 by 6% and for FY22 by 2%. The increase to Fortescue's assumed dividend payout ratio, combined with higher earnings, sees dividends lift 12% and 36% in FY21 and FY22, respectively, for yields of 12.1% and 6.7%. 

The broker lowered its NPV-based valuation by 3% to $20.05, down from $20.63. Despite the slight share price cut, it cited Fortescue as a clear leader on the ASX in terms of dividend yield, and its forecast 12.1% fully franked yield continues to support a hold rating.

Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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