Ferrexpo Plc (FXPO) is a Swiss-based iron ore mining company. It is involved in 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. Presently, the company is the third-largest exporter of Pellets. 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.

The current Non-executive Chairman is Steve Lucas and was appointed on November 28, 2016, as Chairman. Kostyantin Zhevagoholds the responsibilities of the Chief Executive Officer and joined the group in 2007. Chris Mawe holds the responsibilities of Chief Financial officer.

Key Statistics

 

Top Shareholders

 

Recent News

On 19th August 2019, Ferrexpo announced the selection of Mr Vitalii Lisovenko. Mr Lisovenko will hold the position of Senior Independent Director effective immediately. He joined the board in November 2016 as Chairman of Independent Review Committee, Independent Directors Committee and Audit and Remuneration Committees.
 
On 12th August 2019, Ferrexpo announced the selection of Ms Fiona MacAulay. Ms Fiona will hold the position of Chair of the Remuneration Committee and Independent Director effective from August 12, 2019. She holds the experience of over 30 years in upstream gas and oil sector. During her long career, she holds key roles in many leading companies such as British Gas, Rockhopper, Amerada Hessand Mobil.

Financial Highlights – H1 Financial Year 2019 (USD)
 

(Source: Interim Report, Company Website)

In the first half of the financial year 2019, the company’s sales volume increased by 4 per cent to 4,990 kt as compared with the corresponding period of the last year. The total pellet production surged by 5 per cent to 5,353 Kt in H1 FY2019 from 5,096 Kt in the H1 FY2018. The group’s reported revenue increased by 28 per cent to US$787 million as compared to US$617 million in H1 FY18, reflecting a surge in sales volumes and higher iron ore fines prices. The underlying EBITDA rose by 59 per cent to US$372 million against the previous year same period data, due to an increase in sales volumes. The group’s underlying EBITDA margin stood at 47 per cent in H1 FY2019 versus 38 per cent in H1 FY2018. The company’s operating profit for the H1 FY2019 period stood at $329,548 thousand versus $200,459 thousand in the first half of the financial year 2018.The Profit before tax and finance stood at $332,530 thousand in H1 FY2019 versus $202,935 thousand in H1 FY2018. The PBT (Profit before tax) stood at $317,848 thousand in H1 FY2019 versus $179,075 thousand in H1 FY2018.Profit after tax for the period increased by 78 per cent to US$270 million against US$152 million in H1 FY18, driven by lower interest expense and higher profit before tax and finance. The PAT (Profit after tax attributable to the shareholders) stood at $269,435 thousand in H1 FY2019 versus $151,666 thousand in H1 FY2018. Basic earnings per share (EPS) increased to US$45.9 cents as compared to US$25.9 cents in H1 FY18. The company’s diluted earnings per share stood at 45.8 cents in the first half of the financial year 2019 as against 25.8 pence in the first half of the financial year 2018. The interim dividend ordinary per share rose by 100 per cent to US$6.6 cents, due to increased capital investment and continued debt reduction. Net debt stood at US$282 million, a decrease of 24 per cent as compared to US$369 million in H1 FY18. Capital investment in the H1 FY2019 surged twice to US$114 million.

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from $961 million in FY15 to $1,274 million in FY18. Compound annual growth rate (CAGR) stood at 9.85 per cent.
 
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
Cash costs of production of own ore’s iron pellets, divided by own ore’s production volume. The cash cost of production surged 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 growth 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
 
 

The reported gross margin in H1 FY2019 increased by 4.7 per cent to 66.1 per cent against 61.4 per cent reported last year for the same period. The reported EBITDA margin of 49.3 per cent for the H1 FY2019 stood higher than the industry median of 32 per cent. The reported operating margin in H1 FY2019 increased by 9.3 per cent to 42.2 per cent against 32.9 per cent reported last year for the same period. Net margin reported was 34.3 per cent for H1 FY19, reflecting an increase of 9.6 per cent when comparedwith last year data. Return on equity for the current first half of the financial year 2019 stood at 27.5 per cent which was higher than the industry median of 4.9 per cent. On the liquidity front, Ferrexpo Plc’s current ratio was higher than the industry median of 1.93, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the FXPO Plc’s was 0.34x which was lower as compared to the industry median of 0.50x, reflecting that the company is less leveraged as compared to its peers.  

Share Price Performance

Daily Chart as at August-28-19, before the market close (Source: Thomson Reuters)

On August 28, 2019, at the time of writing (before the market close, at 10:38 AM GMT), Ferrexpo Plc shares were trading at GBX 192.60, down by 0.54 per cent against the 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 36.76 per cent below the 52w High and 43.86 per cent above the 52w low. Stock’s average traded volume for 5 days was 2,177,061.00; 30 days – 1,875,149.87 and 90 days – 1,997,822.76. The traded volume (average) for 5 days was up by 16.10 per cent versus 30 days average traded volume. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 1.94. The outstanding market capitalisation was around £1.13 billion, with a dividend yield of 5.64 per cent.

Valuation Methodology
Method 1: Price to Earnings Approach (NTM)


To compare Ferrexpo Plc with its peers, Price/Earnings multiple has been used. The peers are Strategic Minerals Plc (NTM Price/Earnings was 0.39), SidMa Steel Products SA (NTM Price/Earnings was 0.69), United Company RUSAL Plc (NTM Price/Earnings was 4.10), Kaz Minerals Plc (NTM Price/Earnings was 4.56) and EVRAZ Plc (NTM Price/Earnings was 5.70). The average of Price/Earnings (NTM) of the company’s peers was 3.00x (approx.)

Method 2: Price to Cash Flow Approach (NTM)


To compare Ferrexpo Plc with its peers, Price/Cash Flow multiple has been used. The peers are Bushveld Minerals Ltd (NTM Price/Cash Flow was 0.05), Tubos Reunidos SA (NTM Price/Cash Flow was 2.69), United Company RUSAL Plc (NTM Price/Cash Flow was 3.27), Anglo American Plc (NTM Price/Cash Flow was 3.46) and Kaz Minerals Plc (NTM Price/Cash Flow was 3.24). The Average of Price/Cash Flow (NTM) of the company’s peers was 2.55x (approx.)

Risk Assessment and Growth Prospects

The company is the 3rd largest exporter ofpellets and 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.

Conclusion

The company had shown improvement in its top-line and bottom-line performance in the current half-yearly result. The company will be able to increase its production in the upcoming financial year.  

In H1 FY19, based on the healthy pricing of its high-quality iron ore pellets, the company continued to be in a profitable zone with higher cash inflows. In some regions, presently steel demand is muted and reflecting weaker end-user demand and higher raw material costs. However, the company has the capability to deploy capacity to other markets to offset any regional softness. The company’s pricing remains appealing as compared to the chronological levels.

The company sells its product to world-class customers, which include big giants from the steel industry. The company can maintain adequate capital allocation balance between a strong balance sheet, investment for growth and returns to shareholders. 

The company might face macro headwinds with respect to higher commodity input prices, local inflation in the Ukrainian economy and the Brexit uncertainties. The company might face some disruption in business operations due to a deterioration of the geopolitical situation in Ukraine; strengthening of UAH vs the USD; weaker-than-expected pellet premiums; and higher-than-expected mining cost inflation in Ukraine.

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.

Based on the decent  fundamental prospects and supported by valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 193.65 (as on 27^th August 2019) with lower double-digit upside potential based on 3.00x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 2.55x NTM Price/Cash flow (approx.) on FY19E cash flow per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.81469 GBP
*The Buy recommendation is valid for the current price as covered in the report (as on 28^th August 2019).

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