Fortescue Ltd (ASX: FMG) shares have been well and truly out of form this year.
Since the start of 2024, the iron ore giant's shares have lost 37% of their value.
Unfortunately, one leading broker believes there are more declines to come and has reiterated its sell rating this morning.
Brokers says sell Fortescue shares
According to a note out of Goldman Sachs this morning, the broker has responded to the miner's full year results by reiterating its sell rating with a trimmed price target of $15.40.
Based on its current share price of $18.44, this implies potential downside of 16.5% for investors over the next 12 months.
Goldman notes that Fortescue's FY 2024 profits fell short of its expectations. Commenting on the result, the broker said:
FMG reported FY24 underlying EBITDA/NPAT of A$10.7bn/A$5.7bn, -1%/-6% vs GSe A$10.8bn/A$6.0bn with NPAT lower on higher D&A associated with the Iron Bridge project. The final dividend of A89cps was ahead of GSe A84c and net debt of ~US$0.5bn was pre-reported. FY25 operating and cost guidance that was provided with the 4Q result is unchanged.
Four reasons to sell
Goldman has named four reasons why it thinks Fortescue shares are heading lower from here. The first is its valuation compared to peers such as BHP Group Ltd (ASX: BHP). It said:
The stock is trading at a premium to RIO & BHP on our estimates; ~1.2x NAV vs. BHP at ~0.85x NAV and RIO at ~0.75x NAV, ~6x NTM EV/EBITDA (vs. BHP/RIO on ~5.5x/4.5x), and ~1% FCF vs. BHP/RIO on c. 6%/7%. FMG continues to trade at a >10% premium to RIO & BHP on an EV/EBITDA basis, but at a >30% premium on a P/NAV basis, despite being less diversified and having a lower margin and FCF/t iron ore business.
The broker also has concerns about widening discounts for Fortescue's low grade iron ore. It adds:
Widening of low grade 58% Fe product realisations over the medium to long term due to our expectations of increasing supply of low grade iron ore from other projects such as MIN's Ashburton projects (35Mtpa) and high coking coal prices, a normalisation and higher steel mill margins, and the global sector's focus on decarbonisation and preference for higher grade iron ore.
Ramp up risks are a third reason why it thinks Fortescue's shares are a sell. It explains:
Execution and ramp-up risks on the Iron Bridge project in FY25 & FY26 due to water availability and also reliability and performance of key processing equipment (air classifiers etc) which is still yet to be fully tested.
Finally, Goldman remains concerned about Fortescue free cash flow generation as it spends big to decarbonise its operations. It said:
We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious strategy, we assume the company reduces the dividend payout ratio from the current ~70% to ~50% from FY26 onwards (bottom end of the 50-80% guidance range), and increases gross gearing to ~30% by FY27 (but in-line with the company's target of 30-40%).
