Macquarie warns Fortescue restructure could erode share price premium
Make us a preferred source
Make us a preferred source on Google
The news: Macquarie analysts have upgraded its price target on Fortescue Metals following its restructure announcement but has warned it could erode its share price premium over competitors.
The numbers: Macquarie analysts calculate that Fortescue enjoys an implied valuation on its energy business that results in a $5 per share premium over iron ore peers such as BHP and Rio Tinto. However, this may come under pressure with shifts in Fortescue's green energy strategy.
Based on its positive free cash flow leading to potential interest from Australian institutional funds, Macquarie raised Fortescue’s current target price by 16% to $14.50. However they cautioned that erosion of the $5 per share premium, which would become clearer in FY25 guidance, might put this price to the test.
The analysts also retained their 'underperform' rating on the company.
Fortescue's share price fell 1.16% to $22.10 by 12:23pm AEST and over the last 12 months has lowered 2.64%.
The context: Fortescue announced on Wednesday that it would cut 700 jobs as part of a global restructuring to bring metals and energy under one roof. Media sources and analysts expect major restructuring toward cheap renewable energy, cutting out costs on long-underperforming green hydrogen projects.
Macquarie analysts supported Fortescue’s green energy business restructure, particularly its green hydrogen arm. Analysts noted Fortescue had publicly distanced itself from its green hydrogen plants in recent months. However, they proposed that with Fortescue refocusing on cheaper renewables, its energy business may no longer hold sufficient value to justify its $5 per share premium.
Analysts noted that with a projected decline in iron ore prices likely to impact cash flow, it remains to be seen whether ETFs that seek exposure to Fortescue’s hydrogen and green energy or investors that currently value Fortescue’s positive earnings and free cash flow will move first.
What they said: “We have long viewed green hydrogen a challenging business with unfavourable thermodynamics and a price-sensitive end market unwilling to pay a premium on a commodity,” Macquarie said.
“FMG will now focus on operating a leaner business and a more tangible pivot into renewable energy.”
The source: Macquarie research
