ASX iron ore shares are benefiting from a better commodity environment, but is the market fully appreciating how good things are looking for the sector?
The Rio Tinto Ltd (ASX: RIO) share price and BHP Group Ltd (ASX: BHP) share price have both seen a pullback of their valuations since the start of the year. The Fortescue Ltd (ASX: FMG) share price has done a bit better.
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Is the ASX iron ore share sector being undervalued?
According to reporting by the Australian Financial Review, Citi thinks the strength of the iron ore price durability will help deliver strong miners during this reporting season and may lead to an increase in forecasts for profit and dividends in FY24.
Some investors have thought the iron ore price would be at a lower price by this point, but the AFR suggested prices have remained strong thanks to elevated steel production in China, as well as investor optimism that the US economy may only see a reduction.
The broker Citi said to clients:
We expect mark-to-market adjustments across the street will see consensus first-half iron ore forecast profits move higher heading into reporting season.
Second half iron ore price forecasts across the street will also likely need to move higher, boosting profit and dividend forecasts for FY24.
What is the valuation of the miners?
A business is usually valued on expectations of its future annual profit generation.
According to Commsec, Fortescue could be valued at 9 times FY24's estimated earnings, BHP might be valued at 11 times FY24's estimated earnings and Rio Tinto shares could be valued at 10 times FY24's estimated earnings. Those numbers are certainly not as high as other sectors.
Time will tell whether these are good, cheap valuations or not, with a heavy influence from China and the iron ore price.
