Fortescue Metals Group Ltd (ASX: FMG) shares have been on form over the last 12 months.
During this time, the iron ore giant's shares have risen almost 13%.
However, the team at Goldman Sachs is urging investors to lock in these gains on the belief that its shares could soon crash down to earth.
According to a recent note, the broker has retained its sell rating with a trimmed price target of $14.50.
This implies a potential downside of 32% for investors over the next 12 months from current levels.
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Four reasons to sell Fortescue shares
Goldman has named four reasons why it thinks investors should be selling Fortescue shares this month.
The first reason is its relative valuation compared to fellow giants BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO). It said:
The stock is trading at a premium to RIO & BHP on our estimates; 1.5x NAV vs. BHP at c.1.0x NAV and RIO at 0.9x NAV, c.7.5x NTM EV/EBITDA (vs. BHP/RIO on c.6.5x/5.0x), and FY24E FCF of c.3% vs. BHP/RIO on c.5%/6%.
Another reason the broker is bearish is the outlook for low grade iron ore compared to higher grade ore. Its analysts expect the "widening of low grade 58% Fe product realisations over the medium to long term due to high coking coal prices and high steel mill margins."
Goldman also highlights the "execution and ramp-up risks on the Iron Bridge & Gabon projects over FY24" as a third reason to be bearish.
Finally, the broker points out that Fortescue's dividend is likely to come under significant pressure in the coming years as the company increases its decarbonisation spending. It explains:
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 FY23E to US$3.8bn by FY26E.
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 FY24E onwards (bottom end of the 50-80% guidance range), and increases gross gearing to ~30% by FY27E (in-line with the company's target of 30-40%).
