Ferrexpo PLC (LON: FXPO) – Successful ramp of concentrator expansion project yielded a decent production rise in Q4 FY20.

Ferrexpo PLC (LON: FXPO) is a FTSE 250 Index listed iron ore pellet producer with mines in Ukraine (Poltava region) and sales operations internationally. It has been serving the global steel industry by mining, processing, and selling of iron ore for more than 40 years. It possesses nearly 20 billion tonnes of resources, which makes their asset base as the largest iron ore deposit in Europe. It targets to be a cost-efficient producer of iron ore pellet with a reliable logistics infrastructure. The Company has a sizeable logistics infrastructure of 154 barges, 2,850 rail cars and 28 Capesize vessels. It employs over 11,292 people (including subcontractors). The Company launched the Initial Public Offering (IPO) on 15 June 2007, and since then it is a constituent of London Stock Exchange. In FY20, it produced 11.2 million tonnes of pellets which made it the third-largest exporter of pellets to the global steel industry.

On 17 March 2021, Ferrexpo will publish its preliminary results for FY20.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

During Q4 FY20, the Group recorded a 22% rise in iron ore pellet production. At the end of FY20, the Group reported a robust cash position of US$270 million as compared to US$131 million at the end of FY19. Also, the Company has invested around US$2.3 billion in production and mining since the IPO in 2007, and it projects to double the output in Ukraine over the medium term. As a result, it has a strong market reputation with a diversified sales portfolio to provide business resilience. Also, it is a low-cost producer and remains cash flow positive through the commodity cycle. Overall, the Company has a well-invested production process, skilled workforce, global logistic capability, and long-standing customer relationships, which ensures financial stability. In a nutshell, it is the third-largest exporter of pellets to the global steel industry and has a sizeable asset base for catering to a diverse customer portfolio at a competitive cost as compared to peers.

Regarding the risk factors, the Company’s performance is subject to various kinds of risk, such as macro headwinds pertinent to higher commodity prices, and increasing freight rates can put pressure over the delivery cost. Moreover, the location inflation in the Ukrainian economy and Brexit causing further uncertainties to operating cost. Amidst Covid-19 scenario, production stoppages and equipment failures can also impact the performance. Adjacently, declining iron ore prices can affect profitability and cash generation. There is also a risk to supply chain due to resurgence of coronavirus cases. 

Industry Outlook Dynamics

As per the recent report from Global Market Insights, the market size for Global iron ore pellets market is projected to reach nearly US$70 billion by 2026, representing a compounded annual growth rate of 3.2% between 2020 to 2026. The key drivers for the market growth include - Increasing adoption of iron-based chemicals, Growing product consumption across MEA (the Middle East and Africa) region, and Rising awareness regarding the reduction of carbon emissions from steel plants.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Ferrexpo Plc.

Recent Developments

On 12 January 2021: The Company has appointed Liberum Capital Limited ("Liberum") as its Financial Adviser and Corporate Broker with immediate effect.

On 30 November 2020: The Company updated that Kyiv Court has cancelled the restriction covering 50.3% of the shares in Ferrexpo Poltava Mining ("FPM") held by Ferrexpo AG Switzerland.

A Glimpse of Business Segments (FY19)

(Source: Refinitiv, chart created by Kalkine Group)

Q4 FY20 Trading Update and Production Report (as on 12 January 2021)

(Source: Company update)

• The Company had increased iron ore pellet production by 22% quarter on quarter basis to 3.1 million tonnes during Q4 FY20 driven by the successful ramp-up of concentrator expansion project.
• The Company had increased FY20 iron ore pellet production by 7% to 11.2 million tonnes.
• The Company had increased sales volume by 18% to 12.1 million tonnes during FY20 compared to FY19.
• The Company had a cash balance of USD 270 million as of 31 December 2020, while it had a cash balance of USD 131 million as of 31 December 2019.
• The 67% Fe and 65% Fe pellets accounted for 99%of total pellet production in 2020, while it was 96% in 2019.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 05 August 2020)

(Source: Company result)

• The revenue of the Company dropped by 1% to USD 776 million during H1 FY20 compared to USD 787 million for H1 FY19 due to lower realised prices, which was partially offset by increased sales volume.
• The Company had increased the pellet production by 5% to 5.6 million tonnes during H1 FY20, and it had achieved the second-highest first-half production volume since the Company was listed in 2007.
• The underlying EBITDA margin was dropped by 200 basis points to 45% during H1 FY20.
• The Profit After Tax (PAT) was plunged by 8% to USD 250 million during H1 FY20.
• The Company had strengthened its balance sheet by reducing the net debt from USD 282 million during H1 FY19 to USD 174 million for H1 FY20. The Company had increased its cash balance from USD 92 million during H1 FY19 to USD 169 million for H1 FY20
• The Company had managed to reduce its interest expense by 49% year-on-year to USD 8 million during H1 FY20 due to lower outstanding debt.
• On the leverage front, the Company had improved its net debt to last 12 months EBITDA to 0.31x during H1 FY20.
• Based on the strong financial position, the Company had paid an interim dividend of 6.6 US cents per share on 26 August 2020.
• The Company had generated USD 258 million cash flow from the operating activities during H1 FY20, while it was USD 256 million for H1 FY19.
• The Ferrexpo operations had minimum disruptions of Covid-19 pandemic during H1 FY20.
• The Company had increased the spot sales in China compensating for lower pellet demand in the traditional markets.
• The Company had appointed Jim North as the acting CEO and the Director.

Share Price Performance Analysis

On 27 January 2021 (before the market close, at 10:20 AM GMT), Ferrexpo’s shares were trading at GBX 289.01, down by 4.61% against the previous day closing price. Stock 52-week High and Low were GBX 349.00 and GBX 87.48, respectively.

From the technical standpoint, 100-day SMA (222.30), 100-day EMA (241.30), and 14-day RSI (34.42) are supporting the upside potential.

In the last one year, Ferrexpo’s share price has delivered a positive return of around 133.41% return as compared to negative 4.01% return of FTSE-250 index and a positive 1.00% return of FTSE All Industrials index, which shows that the stock has outperformed the index during the last one year.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company continued to operate without any material impact due to the Covid-19 pandemic, and therefore, pellet production reported a decent jump in FY20. In FY20, the Company also declared a special interim dividend of 33.0 US cents following the special dividend of 13.2 US cents, which reflects the Company’s robust cash generation, attractive shareholder return, balance sheet strength, and investment in growth opportunities. The total dividends declared by the Company in FY20 is 33.0 US cents per share.

 As the demand remained strong for iron ore pellets, Ferrexpo continued to perform well. Inevitably, the associated uncertainties of the Covid-19 pandemic will persist for a prolonged period. However, the Company is encouraged by the FY20 performance as it has successfully navigated through the Covid-19 outbreak. Although the steel markets recovery in Japan and Europe will be slower than in China, the competitive cash position on the iron ore cost curve shall provide resilience to adverse market conditions. Therefore, it is confident that it will be able to redirect pellet sales in the respective markets with favourable demand dynamics.

The Company has achieved strong financial and operational performance during FY20 reflected by net cash position of USD 4.0 million as of 31 December 2020. The operations and logistics of the Company were marginally disrupted by Covid-19 pandemic during Q4 FY20. The Group is particular regarding paying dividends and maintaining low debt on its balance sheet.

The Company had expected to begin commissioning of concentrator expansion during H2 FY20 to expand the mine ore processing capacity by around 6 million tonnes per annum. It would further enable the Company to achieve 100% utilization of its installed capacity of 12 million tonnes per annum in FY21. The Company expects that recovery of steel markets in Europe and Japan would be at a slower pace in comparison to recovery in the Chinese steel market. The Company has adapted well towards changing market scenario as it has sold higher volumes in China.

(Source: Presentation, Company Website)

Considering the improved financial performance, fair returns to shareholders, minimal disruptions by Covid-19 pandemic, sustainable business growth rate trajectory, solid balance sheet, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Ferrexpo at the current market price of GBX 289.01 (as on 27 January 2021, before the market close at 10:20 AM GMT) with lower double-digit upside potential based on 5.62 Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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