Why this broker is bearish on the Fortescue Future Industries business

Key points

• The team at Morgans like Fortescue’s iron ore business
• However, it isn’t a fan of the Fortescue Future Industries business
• Its analysts believe the business will make Fortescue more reliant on its iron ore earnings

The Fortescue Metals Group Limited (ASX: FMG) share price started the week on a positive note.

The iron ore giant’s shares rose 2% to end the day at $19.87.

This appears to have been driven by another rise in the benchmark iron ore price to US$129.96 a tonne on Friday night.

Can the Fortescue share price keep rising?

One leading broker has been looking at the Fortescue share price and has cautioned investors against investing.

According to a note out of Morgans, its analysts have retained their hold rating but lifted their price target on the company’s shares to $20.20 following the release of its second quarter update. This is broadly in line with where the Fortescue share price is trading today.

What is the broker saying?

Morgans has mixed feelings with Fortescue. While it is a fan of the core iron ore business, it isn’t positive at all on the Fortescue Future Industries (FFI) business. In fact, rather than diversifying its operations, Morgans believes it will make Fortescue even more reliant on its iron ore earnings.

In respect to its second quarter update, Morgans said: “A good operational result from FMG’s core iron ore business, while the 3Q22 recovery in iron ore prices has helped to support short-term earnings, FCF generation and dividend potential.”

But that’s where the positives largely stop due to the FFI business.

What’s wrong with Fortescue Future Industries?

Morgans notes that Fortescue is making a very aggressive push into a large number of ESG-themed industries in different geographies.

It commented: “Our concern here is FMG’s low starting point in each of the new markets it is pursuing, which suggests capital efficiency will be the first victim before getting to any considerations around the possible long-term return profile.”

“With potential for steel activity to mature in 2022 we are interested to see how FMG’s large ESG-themed investment framework sustains a downcycle in iron ore.”

“While seeking to diversify outside of iron ore, we would argue that the move into FFI (which could see a long period of losses while FMG gets established), is actually equivalent to increasing FMG’s dependence on iron ore earnings,” it added.

This view echoes concerns that other brokers such as Goldman Sachs have on the business. However, Goldman is far more bearish with its sell rating and $13.50 price target on its shares.

All in all, the Fortescue share price will be one to watch closely in the coming years as its ESG push gathers pace. Time will tell whether it creates or destroys value for shareholders.

The post Why this broker is bearish on the Fortescue Future Industries business appeared first on The Motley Fool Australia.

More reading

• Top brokers name 3 ASX shares to sell next week
• What has driven the Fortescue (ASX:FMG) share price up 40% in three months?
• Top brokers name 3 ASX shares to sell today
• Broker tips Fortescue (ASX:FMG) share price to sink 30% and warns of dividend cuts
• 5 things to watch on the ASX 200 on Thursday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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