Weekly Reports | May 02 2025
In Brief discusses a capital boost for Telstra shareholders, while Mineral Resources performs better than feared and MAC Copper starts to flex its muscles.
-Telstra prioritising shareholder rewards
-Mineral Resources calms investor nerves
-MAC Copper shows strength in March
By Danielle Ecuyer
Quote of the week comes from James Aitken, Aitken Advisers:
"'If forty million people say a foolish thing, it does not become a wise one, but the wise man is foolish to give them the lie'", attributed to English writer Somerset Maugham.
Higher capital returns for shareholders
Jarden touched on a very important topic regarding Telstra Group ((TLS)), notably management's ongoing strategic focus on capital management.
In a key strategic reversal from circa -$5.5bn invested in M&A over the last decade, Telstra's incumbent management is now focusing on core competencies and potentially downsizing the group via selective divestments.
The analyst believes the health business, alongside the Network, Applications and Services division, could be sold off as part of a simplification of the company's earnings structure and a concentration on core portfolios to achieve cost efficiencies.
The goal is to drive improved capital returns for shareholders via a dividend payout ratio of circa 90% of cash earnings per share from FY26 onwards, accompanied by share buybacks due to franking credit limitations.
At the upcoming May 27 investor day, Jarden anticipates a "doubling down" on mobiles and fixed infrastructure, and forecasts growth in DPS and EPS at a compound average growth rate of 7% and 9%, respectively, from FY25 to FY28, and around $2.7bn in incremental buybacks by FY30.
The forecasts are couched as "conservative" by the analyst and equate to 1c per share annual dividend growth over the period.
The magnitude of share buybacks is projected at circa $460m for FY26 and around $550m for FY27, compared to $750m in FY25.
Depending on the share price and the payout ratio against franking credits, Jarden believes management can adjust buybacks up or down and may even consider an unfranked portion to the dividend if the share price is too elevated.
Out to FY30, estimated buybacks come in at $3.36bn, inclusive of this year's $750m, with upside to consensus dividend per share forecasts.
Jarden emphasises an Overweight rating (Buy-equivalent), despite what some might consider an elevated valuation of circa 21x. The broker's target price is $4.45 amidst expectations that a focus on capital management and growing shareholder returns will underpin a re-rating of the stock.
By comparison, daily FNArena-monitored brokers have a consensus target price of $4.238, with three Buy-equivalent ratings, two Hold-equivalent, and one Sell-equivalent rating.
Equity raising put on ice, but challenges for MinRes aren't over
Mineral Resources' ((MIN)) March quarter trading update breathed life into the company's flagging share price, with management pushing back against investor concerns over the likelihood of an equity raising. Quarterly results were broadly better than consensus and analyst expectations, notably for cost outcomes.
Goldman Sachs highlighted a smaller-than-expected decline in iron ore shipments during the wet weather season, with marginally better realised iron ore prices and higher lithium volumes relative to its own forecasts.
Management noted the rise in net debt by $0.3bn to $5.4bn at the end of March but emphasised the company will comply with debt covenants on June 30, 2025, in relation to a nine-bank funded revolving credit facility of $800m.
The company believes internal levers can be pulled to obviate the need for an equity issue.
Goldman Sachs applauded the results from the Ashburton iron ore mine, with around 14mtpa equivalent achieved, despite wet weather. The haul road is tracking for next September/October to operate at an annual rate of circa 28mtpa in the June quarter, according to guidance.
FY25 guidance was lowered to 8.58.7mt due to haulage issues, which remains above the analyst's previous forecast.
Regarding lithium, the company surprised to the upside on cost management, with opex of -$120m and capex at -$180m, due to a significant deferral in waste stripping for FY25. The company managed to achieve slightly positive cash flow for its lithium operation in the period. Unit cash costs declined to below US$800/t.
Goldman Sachs increased earnings forecasts by 35% for FY25 and 13% for FY26 due to lower iron ore and lithium cost assumptions, coupled with higher iron ore price realisation and sales volume expectations. The target price remains at $21, but the broker retains a Sell rating on valuation grounds.
Daily monitored brokers have a consensus target price of $28.657, with six Buy-equivalent ratings and one Hold.
While Citi's latest analysis of iron ore cost curves, combined with a -30% decline in iron ore prices over the past year, suggests a decline in producer margins, current prices are still viewed as "healthy" for the industry overall.
Citi's commodities team remains neutral on iron ore and forecasts prices around US$100/t. However, at US$80/t volumes from Fortescue ((FMG)) could be at risk due to its higher cost position. The broker estimates that at or near US$80/t, approximately 230mt of seaborne supply could potentially be at risk.
For MinRes, the breakeven price is already below current spot levels, which implies 910mt of volume could be at risk (excluding Onslow) if current prices persist.
At this stage, the Citi commodities team views its long-term iron ore price assumption of US$85/t as a "floor," rather than an average.
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