Fortescue Metals Group Ltd (ASX: FMG) shares are recovering from a tough session yesterday.
In early afternoon trade, the iron ore miner's shares are up over 1% to $20.13.
Should you buy Fortescue shares?
While it seems that some investors have seen Monday's pullback as a buying opportunity, that certainly isn't the case over at Goldman Sachs.
According to a note, this morning the broker has reiterated its sell rating on the company's shares with a reduced price target of $13.80.
Based on where Fortescue shares are currently trading, this implies a potential downside of over 31% for investors over the next 12 months.
What is the broker saying?
Goldman wasn't impressed with Fortescue's FY 2023 results, which came in below its expectations. It also highlights the shock exit of its CEO after just five months at the helm. The broker explains:
FMG reported FY23 underlying EBITDA/NPAT of US$9.9bn/US$5.5bn, -1%/-3% below GSe on higher than expected Fortescue Energy costs and exploration. Headline NPAT was 16% below GSe after a US$726mn post-tax write down of the Iron Bridge asset mostly on higher opex and an increase in the project's discount rate. The final dividend of A100cps (65% payout), was below our A112cps (70% payout).
The sudden departure of the Fortescue Metals CEO Fiona Hick and replacement with COO Dino Otranto was the biggest surprise from the result release, in our view, considering Fiona Hick had been in the role for only 5 months.
Watch out for dividend cuts
If you were disappointed with Fortescue's dividend cut in FY 2023, then you may be alarmed to learn that this is not the end of the cuts.
Goldman expects the miner to cut its dividend by more than 50% to 54 US cents per share in FY 2024. After which, a cut to 36 US cents per share is expected in FY 2025. The broker commented:
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$6bn of new debt, reduces the dividend payout ratio from the current ~65% in 2H FY23 to ~50% from FY24 onwards (bottom end of the 50-80% guidance range), and increases gross gearing to >30% by FY27 (in-line with the company's target of 30-40%).
