The Fortescue Metals Group Limited (ASX: FMG) share price could be seriously overvalued.
That's the view of analysts at Goldman Sachs following the release of the mining giant's full year results for FY 2022.
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What is Goldman saying about the Fortescue share price?
According to a note out of the investment bank, its analysts have responded to Fortescue's results by reiterating their sell rating and $12.10 price target on the company's shares.
Based on the current Fortescue share price of $18.95, this implies potential downside of 36% over the next 12 months.
What did the broker say?
Goldman notes that Fortescue delivered a full year result in line with expectations. It commented:
FMG reported FY22 underlying EBITDA/NPAT of US$10.6bn/US$6.2bn, in-line/+1% vs. GSe and VA consensus. The final dividend of A121cps (78% payout), was above our A109cps (70% payout). There was no change to iron ore guidance for FY23.
However, once again, the broker highlights that overshadowing this was Fortescue's decarbonisation plans. Goldman continues to believe it will come at a significant cost. It explained:
Regarding decarbonisation of iron ore, FMG continues to target first battery driven electric truck in 2025 with the fleet decarb to be supported by the proposed 5.4GW wind and solar Uaroo project. We think decarbonising the Pilbara could cost FMG over US$7bn (spend not in our numbers) and requires +US$80/bbl oil or an iron ore green premia to be NPV positive.
The broker also warned that the company's dividends could come under pressure from these plans.
We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious new strategy, we assume the dividend payout ratio falls from the current ~75% in FY22 and then to ~50% from FY24 onwards.
Why are its shares overvalued?
Overall, Goldman Sachs believes the Fortescue share price is overvalued based on the undeserved premium it trades at compared to BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO). It explained:
The stock is trading at a premium to BHP & RIO; c. 1.7x NAV vs. RIO & BHP at c. 0.8x & 1.1x NAV, c. 6x EBITDA (vs. BHP on 6x & RIO on c. 3.5x), and c. 4% FCF vs. BHP on c. 4% & RIO on c. 10%.
