BHP Stock – FMG share price: Is the stock overvalued at $20.15?
Getting back to FMG in particular, with iron ore prices still high and the stock itself trading at multi-year highs, one is left wondering if the company is overvalued.
Goldman Sachs thinks the answer is yes. The investment bank this week slapped a Sell rating (from Neutral) on FMG and lowered their price target to $18.9 per share (down from $20.4 per share).
What was their rationale?
Macro View: Centrally, Goldman has a negative view on the outlook for iron ore, arguing that the expectation is for the: ‘Market to enter a surplus in 2H21 on higher Brazilian exports and see the price falling back to US$110/t by 4Q even with a 4-5% increase in global steel production, and to below US$100/t in 2022.’
The investment bank also believes that China’s recent push to curb emissions within its steel industry will be a negative for lower grade producers, such as FMG.
More specifically, the Sell thesis has a few components:
Valuation: Based on its net asset value (NAV), FMG trades at a pronounced premium to its large-cap counterparts RIO and BHP: 1.4x NAV compared to 0.95x NAV, respectively.
Besides that, the price realisations from FMG’s lower grade products, timing risks (associated with the Iron Bridge project) and potential capital expenditure issues.
There was a pretty important qualification to this rating however, with it being noted:
‘With our view that FMG will report a strong March and June Q production report and a record final dividend in August with the FY22 results, our Sell rating is predicated on our thesis playing out in the Dec H.’