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Fortescue Metals (FMG) - Dividend Surprise But For How Long

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Fortescue Metals (FMG) reported H1 FY19 results with revenue of US$3.5bn, EBITDA of US$1.6bn and a NPAT of US$644m (up 10%, 21% and 227% respectively on H2 FY18). The better result was driven by 18% higher iron ore price of US$47/dmt, but 4% higher C1 cash costs and a 3% reduction in sales. Cash and cash equivalents increased by 11% to $962m and gross debt remained unchanged HoH. The big surprise was the interim dividend hike to 19cps (from 11cps) representing a payout ratio of 65% and an additional special dividend of 11cps. We forecast an additional 30% upside in NPAT in the 2H as the effect of the spike in iron ore prices take effect. The market remains on a bullish iron ore, but bearish steel macro trend which should provide short term tail-winds for FMG, but longer term we continue to believe that iron ore prices will pull back.  

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