Treasure Chest | May 30 2012
– Research by Bell Potter finds Fortescue can turn into a major dividend play in years ahead
– Line in the sand, finds Bell Potter, is an iron ore price of US$120/t
– Macquarie also favoures Fortescue in the sector
By Rudi Filapek-Vandyck
All the talk in Sydney yesterday was a report on Fortescue ((FMG)) issued by Bell Potter and highlighted by the stockbroker's institutional market commentator Charlie Aitken. The shares put in a big performance on Tuesday (up 7%) though today's price action is far more subdued on Wednesday morning. So what kind of magic contains this Bell Potter report?
In essence, analysts Stuart Howe and Fred Truong have done the hard yakka and additional number crunching and come to the conclusion that an iron ore price of US$120/tonne should be considered the line in the sand for Fortescue. Unless the price sinks below this price level for a long time, the future continues to look bright, is Bell Potter's message to the investment community. Needless to say, Bell Potter (being a long term supported of the company and the shares) thinks the price will remain above the line in the sand in years ahead.
Bell Potter's conclusion is supported by similar research done by the likes of Goldman Sachs and Citi. Both released in-depth sector analysis earlier this month, but did not specifically zoom in on Fortescue (which just goes to show: sometimes the market wants to be told and to be told again without having to think for itself).
What makes the Bell Potter research unique though is the conclusion that if iron ore prices remain above US$120/tonne, and Fortescue manages to pull off its targeted production expansion to 155Mtpa, the shares are poised to become a yield play in the years ahead. Assuming the board increases the payout ratio to 50% (let's assume here that Bell Potter doesn't just pick this out of thin air) then shareholders should see their annual dividend yield rise to 5% in FY13 and to 14% in FY14. Under a more bullish scenario, assuming iron ore prices rebound and average US$150/t in FY13-14, the projected yield could increase to 7% in FY13 and 20% in FY14, states the report.
Note that while the Bell Potter report received all attention on Tuesday, on Wednesday morning Macquarie issued an in-depth report on the sector concluding Fortescue is its favourite pick in Australia (this no doubt also contributed to the rise in share price yesterday).
Bell Potter did cut its price target on the shares to $7.40 from $8.75 previously, but that's still significantly above today's price of $4.86. Plus the stockbroker believes Fortescue remains an attractive proposition for the likes of BHP Billiton ((BHP)).
FNArena's consensus price target for the shares sits at $7.21, 48.3% above today's share price. Seven out of the eight major stockbrokerages monitored by FNArena rate the stock as a Buy.
Lastly, and this is the key danger for the years ahead, were we to see sustained iron ore prices below US$120/t, Fortescue may require additional capital, says Bell Potter.
Technical limitations
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