The Fortescue Metals Group Limited (ASX: FMG) share price could be vastly overvalued and heading sharply lower.
That's the view of one leading broker which has reiterated its sell rating this morning.
Why is the Fortescue share price overvalued?
According to a note out of Goldman Sachs, in response to the mining giant's softer than expected half year results, its analysts have retained their sell rating and cut their price target to $14.70.
Based on the current Fortescue share price of $21.15, this implies potential downside of 30% over the next 12 months.
What is the broker saying?
Goldman has warned that Fortescue's dividend cut with its half year results might be something that investors need to get used to.
Its analysts commented: "The interim dividend of A86cps was a 70% payout, in-line with GSe, but is the start of lower payout ratios going forward (GSe 50% from FY23) in our view, with FMG indicating iron ore sustaining capex will remain elevated at US$1.5bn (US$8/t) in FY23 and Fortescue Future Industries (FFI) spend will likely increase as projects advance (Pilbara decarbonisation and green hydrogen)."
In addition, the broker continues to believe that the Fortescue share price trades on unreasonably high multiples compared to peers BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
Goldman explained: "The stock is trading at a significant premium to BHP & RIO; c. 1.9x NAV vs. RIO at c. 1.0x NAV, c. 5x EBITDA (vs. BHP & RIO on c. 4x), and c. 5% FCF vs. BHP & RIO on c. 10%, which we think is unwarranted considering the lack of diversification and risks around future capital spend and returns."
Combined with widening low grade iron ore discounts, execution risks on the Iron Bridge project, and uncertainties around the FFI business, Goldman sees the Fortescue as a clear sell.
