What we think of the 3 biggest losers of the ASX 100

2024 was a year of historic market rallies with the S&P5 500 hitting record closing highs returning 28% and its siblings the Nasdaq and Dow Jones returning 32% and 19% respectively.

As we conclude the year we look towards local markets where the materials and energy sectors took major hits to finish in the red whilst tech, financials and real estate rode waves to outperform the ASX 200 which gained 19%.

In this article we’ll explore the biggest losers of the ASX 100 and what Morningstar sees for them in the future.

Biggest losers of the ASX 100 

Spark New Zealand Ltd SPK ★★★★★

• Fair Value Estimate: $3.90
• Share Price: $2.65 (as at 4/12/24)
• Moat Rating: Narrow
• Uncertainty Rating: Medium
• Price to Fair Value: 0.67 (Undervalued)

Tumbling 45% this year is Spark New Zealand Ltd (“Spark”), the embattled telecom and digital services provider.

The share price has taken a hit after posting a decline in profits and cutting FY25 guidance. Morningstar has cut its guidance for the second time this year to $3.90, reflecting structural cost issues and deteriorating revenue trends in its core mobile unit.

Spark’s narrow moat rating is supported by cost advantage and economies of scale in the relatively small New Zealand market. The company is the equal-largest player in mobile with over 40% service revenue market share in an industry with high barriers to entry.

The company’s fixed-line broadband market share is high at 36%, however down from 40% five years ago reflecting pricing pressures and dwindling customer base in fixed-line voice as they migrate to fibre as opposed to copper-based.

Due to management cuts to mobile revenue expectations, we reduce our earnings before interest, tax, depreciation and amortization and investment income forecasts by ~5%. We also further reduce our dividends per share forecast by around 10% with out fiscal 2025 projection of NZD 0.25 (75% imputed), in line with management guidance.

Our fair value estimate for Spark is $3.90 implying a forward fiscal year price/earnings multiple of 25.6x and a dividend yield of 5.8%. The company remains comfortably geared with steady free cash flow meaning that operations, maintenance capital expenditure and investment can be internally funded.

Spark has announced an ambitious data centre expansion strategy with a 118MW development pipeline that will require over NZD 1 billion of capital over the next five to seven years. Management shows no sign of easing up on this vision as it actively seeks capital partners.

Morningstar believes shares in narrow-moat Spark remain attractive, trading at a 33% discount. We consider it may be jarring for income-focused investors to see a defensive company in an earnings and dividend downcycle however this souring sentiment is likely to linger.

Mineral Resources Ltd MIN ★★★★★

• Fair Value Estimate: $64.00
• Share Price: $35.10 (as at 4/12/24)
• Moat Rating: None
• Uncertainty Rating: High
• Price to Fair Value: 0.55 (Undervalued)

As the biggest loser on this list (down 50%), I recently explored Mineral Resources Ltd (“MinRes”) in an article about the lithium outlook and miners that currently screen cheap.

The Western Australian government recently threw six lithium players a $150 million lifeline after a wide suspension of operations due to the recent lithium price depression.

MinRes holds a portfolio of mining operations across lithium and iron ore. The business consists of three core pillars: Mining Services, Commodities, and Innovation and Infrastructure. The miner maintained all fiscal 2025 volume and cost guidance with the release of first-quarter fiscal 2025 results.

Financial health is currently weak with high debt levels however we expect this to rapidly decline by fiscal 2028. They board has expressed the intention to bolster the company’s balance sheet while lithium prices are low with a net debt/EBITDA of 4.2 at end-June 2024.

At the end of October, the company announced the sale of its gas assets for $800 million and a further $300 million pending certain conditions. The transaction consideration nets more than previously ascribed therefore leads to our fair value increase.

Morningstar believes that the shares remain materially undervalued, but uncertainty remains high. Further, high debt levels and volatile commodity prices could conjure a perfect storm. However, the current share price does not effectively account for the improvement in forecasted lithium prices.

We project a compounded annual growth rate of 13% for 10-year group EBITDA and a fiscal 2034 midcycle EBITDA margin of 41%. Current midcycle EBITDA hovers around 20%, weakened by low prices.

The company’s share price nosedive can largely be attributed to falling iron ore and lithium prices. Further uncertainty spurred by allegations against founder, Chris Ellison haven’t helped either.

My colleague further explores this collapse with our resident MinRes analyst, Mark Taylor, who details what has happened over the past few years and where he thinks the company is headed.

At the current share price of $35.50 MinRes trades 45% below our fair value estimates.

Fortescue Ltd FMG ★★

• Fair Value Estimate: $15.30
• Share Price: $19.70 (as at 4/12/24)
• Moat Rating: None
• Uncertainty Rating: High
• Price to Fair Value: 1.29 (Overvalued)

Falling 33% in 2024, Fortescue Ltd (“FMG”) has had a tough year amid weaking iron ore prices leading to widespread redundancies. The miner’s business operations include the exploration and development of iron ore as well as the transition to green renewables through Fortescue Future Industries (“FFI”).

As the world’s fourth-largest iron ore exporter, FMG’s margins remain well below industry giants like BHP and Rio Tinto, putting it in the highest half of the cost curve, driving our no-moat rating. Furthermore, the iron ore produced is of a lower quality than its major competitors, warranting sales at material discounts and creating a competitive disadvantage.

The firm is a China fixed-asset investment play as the majority of iron ore is sold there. We predict the demand for steel in China to decline as the country’s infrastructure matures and the rate of urbanization past its peak.

Return on invested capital (“ROIC”) has averaged ~35% in the dive years ended June 2024, however this has been characterised by iron ore prices that are far in excess of our long-term estimates. If we assume prices converge toward our estimates of ~70 USD per metric ton from 2028, the ROIC will fall below its weighted average cost of capital of 9.5%.

First quarter fiscal 2025 iron-ore shipments are robust, and guidance is reiterated. Shipments are up 3% on last year but down 12% on the prior quarter. Our expectations are for earnings to decline by 19% per year on average to midcycle fiscal 2029 driven by lower iron ore prices and greater discounts received on hematite ore sales.

FMG’s balance sheet is very strong due to historically elevated iron ore prices and accelerated debt repayments. Net debt at the end of June 2024 was USD 0.5 billion compared to trailing 12 months earnings of USD10.7 billion.

Due to our lower iron ore price outlook, we maintain our $15.30 fair value estimate for no-moat FMG (down from $16.20 per share). Morningstar analyst Jon Mills believes higher near-term iron prices driven by optimism over increased steel demand from China’s stimulus are likely the main driver of FMG trading at a 30% premium to its fair value.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.