Overview
Ferrexpo Plc (FXPO) is a Swiss-based iron ore mining company. It is involved into the production, processing and export of iron ore pellets. The company’s assets are established in the Poltava region of Ukraine. The company serves customers in Europe and Asia including Slovakia, Austria, China, South Korea, Germany, Czech Republic, Taiwan, Turkey, Vietnam and Japan. Ferrexpo also carries out ore processing and logistics operations. The company is in the business of processing, mining and selling top notch iron ore pellets to the worldwide steel industry for more than 40 years. The company is having an employee base of 11,157, including contractors. Ferrexpo Plc’s management includes Steve Lucas as Non-Executive Chairman, Kostyantin Zhevago as Chief Executive Officer and Chris Mawe as Chief Financial Officer.

Key Statistics


Top Shareholders
 

Operational Performance – Q1 FY19

(Source: Production report, Company website)
 
The company’s total 1Q 2019 pellet production stood at 2,539 thousand tonnes (1Q 2018: 2,585 thousand tonnes) and in Q4 2018 the company had higher production of 2,765 thousand tonnes. Production of 65% Fe pellets from own ore increased by 0.41 per cent to 2,431 thousand tonnes in Q1 2019 from Q1 2018 production of 2,421 thousand tonnes. The company is being the 3rd largest exporter of pellets and holds a market share of around 8.5 per cent.
 
Financial Highlights – Financial Year 2018 (US $, thousand)
 

(Source: Annual Report, Company Website)
 
For the financial year ending 31^st December 2018, the company’s revenue surged by 6.4 per cent to $1,274,030 thousand against $1,197,494 thousand for FY2017, driven by increase in sales of iron ore pellets and concentrate, Freight revenue related to sales of iron ore pellets & concentrate and Revenue from other sales & services provided. Gross profit of the company was down by 2.53 per cent to $766,091 thousand for FY2018 from $786,004 thousand in FY2017. The underlying EBITDA declined by 8.7 per cent to $502,897 thousand against the previous year value of $550,705. Operating profit for the FY2018 dipped by $62,460 thousand to $427,579 thousand from $490,039 thousand in FY2017. PBT (Profit before tax) was $392,022 thousand in FY2018 versus $449,833 thousand in FY2017. The profit for the year stood at $335,221 thousand in FY2018 against $394,472 thousand in FY2017. There was a decline of 15 per cent reflecting increased sales prices offset by higher production costs, lower sales volumes and a foreign exchange loss compared with a gain in 2017. Basic earnings per share (EPS) decreased to US$56.9 cents as compared to US$67.1 cents in the financial year 2017. The company’s reported diluted earnings per share declined to US$56.7 cents in FY2018 from US$ 66.9 cents in FY2017. The dividend per share rose by 40 per cent to US$23.1 cents, due to increased capital investment and continued debt reduction. The company’s net cash flow from operations dipped to US$292 million in FY2018 from US$353 million for FY2017.
 
Key Performance Indicators
 

Underlying EBITDA

Underlying EBITDA measures the company’s ability to generate cash as well as providing a useful measure of operating performance excluding certain non-cash items. The Underlying EBITDA for FY2018 dipped to $503 million from $551 million in FY2017, reflecting higher price offset by higher costs and low sales volume.
 

Net Debt to EBITDA
Debt to underlying EBITDA is used to monitor its debt levels in relation to profitability. In 2018, net debt to underlying EBITDA reduced to 0.67 times as against 0.72 for the FY2017.
 

Net Cash Flow from Operating Activities
Net cash flow from operating activities represents the cash flow generation ability of the Company and indicates available cash flow for investments, returns to shareholders and debt reduction. Net cash flow from operating activities was US$292 million, reflecting lower EBITDA and working capital build mainly due to a temporary increase in stocks.
 

Cash Costs
The cash cost of production increased to US$43.3 per tonne. This reflected higher commodity input prices, local inflation and increased mining and maintenance activity.



Sales by Region
The sales in the geographic region Turkey, ME and India remained flat at 6 per cent for the FY2018. Whereas sales from regions like China and Southeast Asia, Northeast Asia and Western Europe had increased in comparison with FY2017 and represents 13 per cent, 17 per cent and 16.5 per cent respectively for the FY2018. Central Europe constitutes the major portion of sales with 47 per cent in FY2018 as compared to 49 per cent in FY2017. In FY2018, North America represents 0.51 per cent of total sales.
 
Financial Ratios
 
 
(Source: TR)

The reported gross margin in FY2018 declined by 5.5 per cent to 60.1 per cent against 65.6 per cent reported last year for the same period. The reported EBITDA margin of 39.4 per cent for the FY2018 stood higher than the industry median of 16.5 per cent. Net margin reported was 26.3 per cent for the financial year 2018, reflecting a decrease of 6.6 per cent when comparedwith last year data. Return on equity for the current financial year stood at 45.1 per cent which was higher than the industry median of 10.30 per cent. On the liquidity front, Ferrexpo Plc’s current ratio was lower than the industry median of 1.87, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the FXPO Plc’s was 0.46x which was higher as compared to the industry median of 0.39x, reflecting that the company is more leveraged as compared to its peers.  
 
Share Price Performance

Daily Chart as at May-15-19, before the market close (Source: Thomson Reuters)

On May 15, 2019, at the time of writing (before the market close, at 12:12 PM GMT), Ferrexpo Plc shares were trading at GBX 217.50, down by 0.68 per cent against its previous day closing price. Stock's 52 weeks High and Low are GBX 304.57/GBX 133.88. At the time of writing, the share was trading 28.58 per cent lower than its 52w High and 62.45 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,783,731.60; 30 days – 2,445,759.87 and 90 days – 2,043,720.11. The average traded volume for 5 days was down by 27.07 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.77, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £1.29 billion with a dividend yield of 3.49 per cent.

Valuation Methodology


To compare Ferrexpo Plc with its peers, EV/Sales multiple has been used. The peers are Boliden AB (NTM EV/Sales was 1.21), Ramada Investimentos e Industria SA (NTM EV/Sales was 1.51), Severstail PAO (NTM EV/Sales was 1.67) and EVRAZ Plc (NTM EV/Sales was 1.30). The median of EV/Sales (NTM) of the company’s peers was 1.40x (approx.)

Method 2: Price to Cash flow Approach (NTM)

*All forecasted figures and Peers information has been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.774231 GBP
 
Recent News
On 29th April 2019, Ferrexpo Plc announced the Resignation of Auditor and Directors. Deloitte LLPhas announced resignation from its post of the statutory auditor. The groups two independent directors - Head of the Audit Committee, Mary Reilly, and Head of the Remuneration Committee, Bert Nacken resigned from their position. The company is expected to manage the structure post the recent changes given its profile and efforts towards business.

Growth and risks Assessment
The company is the 3rd largest exporter ofpelletsand has maintained top-notch quality and at a lower cost. The company sell its product to world-class customers which include big giants from the steel industry. The company is able to maintain adequate capital allocation balance between a strong balance sheet, investment for growth and returns to shareholders. The company has well established internal control systems which help them to mitigate the risks associated with the working of the company. The company might face macro headwinds with respect to higher commodity input prices, local inflation in the Ukrainian economy and the Brexit uncertainties.

Conclusion
The company had shown improvement in its top-line performance in the current financial year. Despite the company’s profitability had declined but it is still above the industry median. The company was able to increase its production in the current financial year.  The company is focussed on utilizing its capital expenditure on the growth project ranging between US$220 million to US$300 million. The company’s 2019 production volumes are in line with 2018 at 10.6 million tonnes approx. The company’s expected cost of production will rise in 2019 due to higher commodity input prices and local inflation in the Ukrainian economy.Ferrexpo share price is also inching towards 52w high, while there are more possibilities for future growth and surge in the price level. Based on  fundamental prospects and support from valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 219 (as on 14th May 2019) with high single-digit upside potential based on 1.40x NTM EV/Sales multiple (approx.) on FY19E sales (approx.) and 3.40x NTM Price to Cash flow (approx.) on FY19E cash flow per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on 15th May 2019).

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