- •Contents
- •Revisions to our forecasts, TPs and ratings
- •Investment stance
- •Capital cycle favours rising returns
- •Comfortable balance sheets and supportive dividend potential
- •Value relative to other stocks
- •Yield potential through the cycle
- •Mid-cycle cash generation offers supportive yields
- •Where to hide if you are bearish
- •What to buy if you are bullish
- •Limited lives weighing down IRR
- •Yields should compensate for limited lives
- •Positive earnings momentum continues to support share prices
- •Commodity price revisions
- •Commodity section
- •Commodity section
- •Preference for base metals over steelmaking materials
- •Earnings revisions
- •Risks and catalysts
- •Peer comp charts
- •Commodity price and exchange rate forecasts
- •Important publications
- •African Rainbow Minerals
- •Alrosa
- •Anglo American
- •Assore
- •Exxaro
- •Glencore
- •Kumba Iron ore
- •NorNickel
- •Rio Tinto
- •Rusal
- •Vale
- •Gold Fields
- •Harmony
- •Polymetal
- •Anglo American Platinum
- •Lonmin
- •Northam
- •Royal Bafokeng Platinum
- •Sasol
- •Disclosures appendix
vk.com/id446425943
Exxaro – BUY
Renaissance Capital
1 April 2019
Metals & Mining
Figure 115: Exxaro, ZARmn (unless otherwise noted)
|
|
|
|
Exxaro |
EXXJ.J |
Target price, ZAR: |
190 |
Market capitalisation, ZARmn: |
59,289 |
Last price, ZAR: |
164 |
Enterprise value, ZARmn: |
64,068 |
Potential 12-month return: |
26.5% |
Dec-YE |
2017 |
2018 |
2019E |
2020E |
2021E |
Income statement |
|
|
|
|
|
Revenue |
22,813 |
25,491 |
26,419 |
32,523 |
32,945 |
Underlying EBITDA |
7,207 |
7,280 |
7,151 |
8,266 |
8,285 |
Underlying EBIT |
5,814 |
5,699 |
5,330 |
6,219 |
6,328 |
Net operating profit |
975 |
5,703 |
5,330 |
6,219 |
6,328 |
Net interest |
-609 |
-316 |
-311 |
-391 |
-388 |
Equity accounted income |
3,952 |
3,259 |
5,721 |
4,837 |
4,182 |
Taxation |
-1,542 |
-1,653 |
-1,405 |
-1,632 |
-1,663 |
Minority interest in profit |
-50 |
-32 |
-82 |
-46 |
-24 |
Net profit for the year |
5,982 |
7,030 |
9,253 |
8,987 |
8,435 |
Headline earnings |
1,560 |
6,707 |
9,253 |
8,987 |
8,435 |
HEPS, ZAR |
5.02 |
26.72 |
36.85 |
35.79 |
33.59 |
Thomson Reuters consensus, ZAR |
|
|
27.09 |
25.49 |
24.40 |
Diluted HEPS, ZAR |
4.50 |
20.57 |
28.21 |
27.35 |
25.67 |
DPS declared, ZAR |
19.55 |
10.85 |
20.70 |
18.10 |
15.50 |
Underlying EBIT |
|
|
|
|
|
Eskom coal |
4,055 |
3,155 |
3,425 |
3,796 |
3,804 |
EBIT margin |
35% |
24% |
24% |
23% |
22% |
Export and other coal |
2,023 |
2,946 |
2,218 |
2,798 |
2,902 |
EBIT margin |
19% |
25% |
19% |
18% |
18% |
Ferrous |
46 |
14 |
6 |
6 |
6 |
Corporate and other |
-310 |
-416 |
-320 |
-380 |
-383 |
Underlying EBIT |
5,814 |
5,699 |
5,330 |
6,219 |
6,328 |
Group EBIT margin |
25% |
22% |
20% |
19% |
19% |
Pigment and mineral sands |
1,485 |
1,307 |
486 |
417 |
278 |
EBIT margin |
35% |
24% |
24% |
23% |
22% |
Iron ore |
3,334 |
3,293 |
6,600 |
5,240 |
4,415 |
EBIT margin |
35% |
24% |
24% |
23% |
22% |
Other equity accounted |
1,060 |
533 |
380 |
540 |
640 |
Proportionately consolidated EBIT |
11,693 |
10,832 |
12,796 |
12,416 |
11,661 |
Income statement ratios |
|
|
|
|
|
EBITDA margin |
32% |
29% |
27% |
25% |
25% |
EBIT margin |
25% |
22% |
20% |
19% |
19% |
HEPS growth |
-61% |
432% |
38% |
-3% |
-6% |
Dividend payout ratio on headline earnings |
327% |
41% |
80% |
72% |
66% |
Input assumptions |
|
|
|
|
|
ZAR/$ |
13.31 |
13.24 |
14.28 |
14.40 |
14.49 |
Iron ore fines (62% Fe, CIF China), $/t |
71 |
66 |
88 |
85 |
78 |
Thermal coal benchmark, $/t |
85 |
98 |
85 |
84 |
84 |
Export realisations, $/t |
69 |
77 |
67 |
69 |
73 |
Required breakeven price |
|
|
|
|
|
Export coal breakeven price, $/t |
77 |
82 |
75 |
72 |
72 |
Kumba Iron Ore breakeven price, $/t |
40 |
35 |
32 |
41 |
39 |
Sales volumes, kt |
|
|
|
|
|
Eskom coal - commercial |
15,151 |
12,361 |
14,961 |
17,408 |
15,700 |
GMEP Eskom |
8,500 |
12,500 |
12,500 |
12,500 |
12,500 |
Other domestic coal |
5,325 |
4,684 |
4,618 |
2,922 |
3,300 |
Export coal |
7,612 |
7,965 |
9,011 |
13,576 |
13,000 |
Iron ore - Sishen Iron Ore Company |
8,979 |
8,652 |
8,790 |
8,960 |
8,900 |
Copper equivalent volumes, kt |
537 |
464 |
496 |
546 |
533 |
Volume growth |
-1.7% |
-13.5% |
6.8% |
10.2% |
-2.4% |
Contribution to proportionately consolidated FY19E attributable underlying EBITDA
Pigment & Sands |
Other |
|
|
3% |
Coal |
||
5% |
|||
|
|||
|
|
46% |
Iron ore 46%
Dec-YE |
|
|
|
|
2019E |
2020E |
2021E |
|
2017 |
2018 |
|
||||
Balance sheet |
|
|
|
|
|
|
|
Net operating assets |
|
21,702 |
28,100 |
|
31,047 |
33,013 |
34,178 |
Investment in associates |
|
17,289 |
17,046 |
|
16,660 |
16,552 |
16,729 |
Investments |
|
319 |
-134 |
|
-134 |
-134 |
-134 |
Equity |
|
40,103 |
41,846 |
|
45,467 |
47,838 |
50,444 |
Minority interest |
|
-738 |
-701 |
|
-685 |
-675 |
-671 |
Net debt |
|
-55 |
3,867 |
|
2,791 |
2,269 |
1,000 |
Balance sheet ratios |
|
|
|
|
|
|
|
Gearing (net debt/(net debt+equity)) |
|
-0.1% |
8.5% |
|
5.8% |
4.5% |
1.9% |
Net debt to EBITDA (<1.5x) |
|
0.0x |
0.4x |
|
0.2x |
0.2x |
0.1x |
RoCE |
|
25.7% |
21.4% |
|
22.8% |
20.8% |
18.8% |
RoIC |
|
18.4% |
15.3% |
|
19.3% |
17.0% |
13.5% |
RoE |
|
4.1% |
16.4% |
|
21.2% |
19.3% |
17.2% |
Cash flow statement |
|
|
|
|
|
|
|
Operating cash flow |
|
7,067 |
8,367 |
|
11,045 |
12,017 |
10,097 |
Capex (net of disposals) |
|
-3,921 |
-5,790 |
|
-6,447 |
-4,942 |
-3,142 |
Other cash flows |
|
2,233 |
-1,540 |
|
2,100 |
0 |
0 |
FCF |
|
5,379 |
1,037 |
|
6,698 |
7,075 |
6,955 |
Equity shareholders' cash |
|
5,110 |
1,561 |
|
6,708 |
7,138 |
7,098 |
Dividends and share buy-backs |
|
-3,715 |
-5,483 |
|
-5,632 |
-6,616 |
-5,829 |
Excess cash |
|
1,395 |
-3,922 |
|
1,076 |
522 |
1,269 |
Cash flow ratios |
|
|
|
|
|
|
|
Working capital days |
|
21 |
23 |
|
21 |
20 |
21 |
Capex/EBITDA |
|
54.4% |
79.5% |
|
90.2% |
59.8% |
37.9% |
FCF yield |
|
18.6% |
2.8% |
|
15.5% |
16.5% |
16.7% |
Cash conversion |
|
3.3x |
0.2x |
|
0.7x |
0.8x |
0.8x |
Equity shareholders' yield |
|
17.2% |
4.6% |
|
16.3% |
17.3% |
17.2% |
Valuation ratios |
|
|
|
|
|
|
|
P/E multiple |
|
26.2x |
6.6x |
|
5.8x |
6.0x |
6.4x |
Dividend yield |
|
16.6% |
8.0% |
|
12.6% |
11.0% |
9.4% |
EV/EBITDA |
|
3.3x |
3.8x |
|
3.9x |
3.2x |
3.4x |
P/B |
|
1.0x |
1.0x |
|
1.2x |
1.1x |
1.1x |
NAV per share, ZAR |
|
121 |
129 |
|
139 |
146 |
153 |
Valuation |
|
|
|
|
|
|
|
Calculation of target price |
|
|
|
|
ZARmn |
ZAR/sh |
|
Coal at DCF fair value |
|
|
|
|
29,302 |
87 |
|
Sishen Iron Ore Company at DCF fair value |
|
|
|
|
24,837 |
74 |
|
Tronox at market value |
|
|
|
|
6,479 |
19 |
|
50% interest in Moranbah South at $100mn |
|
|
|
|
1,440 |
4 |
|
Other at DCF fair value |
|
|
|
|
2,842 |
8 |
|
Attributable enterprise value |
|
|
|
|
64,900 |
192 |
|
Investments as at 31 December 2018 |
|
|
|
|
-134 |
-0 |
|
Net debt as at 31 December 2018 |
|
|
|
|
-3,867 |
-11 |
|
Share issues (buy-backs) during 2019E |
|
|
|
|
0 |
0 |
|
Other |
|
|
|
|
996 |
3 |
|
Equity value |
|
|
|
|
61,895 |
184 |
|
Plus: one-year forward equity shareholders' cash |
|
|
|
|
20 |
||
Less: dividends paid |
|
|
|
|
|
-18 |
|
One-year forward equity value |
|
|
|
|
|
186 |
|
TP, rounded to |
|
|
|
|
|
190 |
|
Share price on 26/3/2019 |
|
|
|
|
|
164 |
|
Expected share price return |
|
|
|
|
|
15.7% |
|
Plus: expected dividend yield |
|
|
|
|
|
10.7% |
|
Total implied one-year return |
|
|
|
|
|
26.5% |
|
Share price range, ZAR: |
|
|
|
|
|
|
|
12-month high on 19/3/2019 |
175 |
12-month low on 4/4/2018 |
103 |
||||
Price move since high |
-5.9% |
Price move since low |
|
60.1% |
|||
Calculation of discount rate |
|
|
|
|
|
|
|
WACC |
14.7% |
Cost of debt |
|
|
10.0% |
||
Risk-free rate |
9.0% |
Tax rate |
|
|
28% |
||
Equity risk premium |
5.0% |
After-tax cost of debt |
|
7.2% |
|||
Beta |
1.30 |
Debt weighting |
|
10% |
|||
Cost of equity |
15.5% |
Terminal growth rate |
|
3% |
Source: Bloomberg, Thomson Reuters, Company data, Renaissance Capital estimates
69
vk.com/id446425943
Fortescue Metals Group – BUY
Renaissance Capital
1 April 2019
Metals & Mining
Figure 116: Fortescue Metals Group, $mn (unless otherwise noted)
|
|
|
|
Fortescue Metals Group |
FMG.AX |
Target price, AUD: |
7.10 |
Market capitalisation, $mn: |
14,494 |
Share price, AUD: |
6.62 |
Enterprise value, $mn: |
17,606 |
Potential 12-month return: |
22.7% |
Jun-YE |
2017 |
2018 |
2019E |
2020E |
2021E |
Income statement |
|
|
|
|
|
Revenue |
8,447 |
6,887 |
8,928 |
10,126 |
9,750 |
Underlying EBITDA |
4,728 |
3,182 |
5,042 |
5,722 |
4,952 |
EBIT |
3,450 |
1,873 |
3,808 |
4,066 |
3,068 |
Net interest |
-483 |
-628 |
-257 |
-168 |
-174 |
Taxation |
-874 |
-367 |
-1,036 |
-1,131 |
-839 |
Minority interest in profit |
0 |
1 |
0 |
0 |
0 |
Net profit for the year |
2,093 |
879 |
2,514 |
2,768 |
2,054 |
Basic EPS, USc |
67.30 |
28.20 |
81.92 |
91.36 |
67.90 |
Thomson Reuters consensus EPS, USc |
|
|
74.66 |
53.99 |
41.93 |
DPS declared, USc |
33.93 |
17.82 |
70.72 |
74.00 |
55.00 |
Income statement ratios |
|
|
|
|
|
EBITDA margin |
56% |
46% |
56% |
57% |
51% |
EBIT margin |
41% |
27% |
43% |
40% |
31% |
EPS growth |
112% |
-58% |
190% |
12% |
-26% |
Dividend payout ratio |
50% |
63% |
86% |
81% |
81% |
Input assumptions |
|
|
|
|
|
Iron ore (62%Fe, CIF China), $/t |
69.5 |
67.4 |
75.2 |
88.3 |
82.5 |
FMG average realisations, $/t |
53.5 |
43.6 |
56.4 |
63.4 |
61.0 |
Price realisation vs benchmark, % |
77% |
65% |
75% |
72% |
74% |
C1 cash costs, $/t |
12.8 |
12.4 |
12.9 |
13.9 |
15.4 |
Freight - Australia to China, $/t |
5.5 |
7.2 |
7.1 |
7.7 |
8.7 |
Breakeven 62% benchmark price, $/t |
43.8 |
51.6 |
48.7 |
58.7 |
58.5 |
$/AUD |
0.75 |
0.78 |
0.72 |
0.76 |
0.80 |
Sales volumes, mnt |
|
|
|
|
|
FMG mine ore shipped |
170.3 |
169.7 |
167.7 |
170.0 |
170.0 |
Equity share of the JV |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Third party ore |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Total volumes |
170.3 |
169.7 |
167.7 |
170.0 |
170.0 |
Attributable Cu eq volumes, kt |
1,652 |
1,646 |
1,627 |
1,649 |
1,649 |
Volume growth |
0.9% |
-0.4% |
-1.2% |
1.4% |
0.0% |
Balance sheet |
|
|
|
|
|
Net operating assets |
12,367 |
12,844 |
12,733 |
12,575 |
12,081 |
Investments |
0 |
0 |
0 |
0 |
0 |
Equity |
9,720 |
9,719 |
11,007 |
10,877 |
11,268 |
Minority interest |
14 |
13 |
13 |
13 |
13 |
Net debt |
2,633 |
3,112 |
1,713 |
1,685 |
800 |
Balance sheet ratios |
|
|
|
|
|
Gearing* |
21.3% |
24.3% |
13.5% |
13.4% |
6.6% |
Net debt to EBITDA |
0.6x |
1.0x |
0.3x |
0.3x |
0.2x |
RoCE |
21.1% |
11.7% |
23.5% |
25.4% |
19.7% |
RoIC (after tax) |
19.1% |
3.1% |
19.2% |
16.7% |
13.1% |
RoE |
23.1% |
9.0% |
24.3% |
25.3% |
18.6% |
Jun-YE |
|
|
|
2019E |
2020E |
2021E |
2017 |
2018 |
|
||||
Cash flow statement |
|
|
|
|
|
|
Operating cash flow |
4,482 |
1,807 |
|
3,957 |
4,323 |
3,846 |
Growth capex |
-362 |
-383 |
|
-620 |
-600 |
-300 |
Maintenance capex |
-354 |
-507 |
|
-580 |
-680 |
-876 |
Other movements |
-111 |
-72 |
|
28 |
0 |
0 |
FCF |
3,655 |
845 |
|
2,785 |
3,043 |
2,670 |
Equity shareholders' cash |
3,317 |
406 |
|
2,605 |
2,926 |
2,548 |
Dividends and share buy-backs |
-762 |
-885 |
|
-1,206 |
-2,898 |
-1,664 |
Surplus (deficit) cash |
2,555 |
-479 |
|
1,399 |
28 |
885 |
Cash flow ratios |
|
|
|
|
|
|
Working capital days** |
0.5 |
0.9 |
|
13.4 |
9.3 |
10.2 |
Capex/EBITDA |
15.1% |
28.0% |
|
23.8% |
22.4% |
23.7% |
FCF yield |
23.6% |
5.6% |
|
17.3% |
19.0% |
17.7% |
Cash conversion |
1.6x |
0.5x |
|
1.0x |
1.1x |
1.2x |
Equity shareholders' yield |
25.8% |
3.4% |
|
18.1% |
20.5% |
17.8% |
Valuation |
|
|
|
|
|
|
Calculation of target price |
|
|
|
|
|
AUD |
Net present value @ discount rate of 12% |
|
|
|
|
|
7.14 |
Rounded to |
|
|
|
|
|
7.10 |
Share price on 26/3/2019 |
|
|
|
|
|
6.62 |
Expected share price return |
|
|
|
|
|
7.3% |
Plus: expected dividend yield |
|
|
|
|
|
15.5% |
Total implied one-year return |
|
|
|
|
|
22.7% |
Share price range, AUD: |
|
|
|
|
|
|
12-month high on 19/3/2019 |
6.96 |
12-month low on 12/9/2018 |
3.45 |
|||
Price move since high |
-4.9% |
Price move since low |
|
91.6% |
||
Calculation of discount rate |
|
|
|
|
|
|
WACC |
12.3% |
Cost of debt |
|
|
7.0% |
|
Risk-free rate |
4.0% |
Tax rate |
|
|
30% |
|
Equity risk premium |
7.0% |
After-tax cost of debt |
|
4.9% |
||
Beta |
1.30 |
Debt weighting |
|
10% |
||
Cost of equity |
13.1% |
Terminal growth rate |
|
0.0% |
||
Valuation ratios |
|
|
|
|
|
|
Jun-YE |
2017 |
2018 |
|
2019E |
2020E |
2021E |
P/E multiple |
6.1x |
13.8x |
|
5.8x |
5.2x |
7.0x |
Dividend yield |
8.2% |
4.6% |
|
15.0% |
15.7% |
11.6% |
EV/EBITDA |
3.3x |
4.8x |
|
3.2x |
2.8x |
3.0x |
P/B |
1.3x |
1.2x |
|
1.3x |
1.3x |
1.3x |
NAV per share, $ |
3.1 |
3.1 |
|
3.6 |
3.6 |
3.7 |
*Gearing is defined as net debt/(net debt +equity)
**Working capital days is defined as (working capital/revenue)*365
Source: Bloomberg, Thomson Reuters, Company data, Renaissance Capital estimates
70