Ferrexpo PLC (LON: FXPO) – Shift to high grade, high-quality iron ore products.

Ferrexpo PLC is an 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 iron ore for more than 40 years. It possesses nearly 20 billion tonnes of resources, which makes its asset base the largest iron ore deposit in Europe. It targets to be a cost-efficient producer of iron ore pellets with a reliable logistics infrastructure. The Company has a sizeable logistics infrastructure of barges, rail cars and Capesize vessels. The Company launched the Initial Public Offering on 15 June 2007, and since then, it is a constituent of the London Stock Exchange.

On 6 October 2021, FXPO would release its Q3 FY2021 production report.

Iron Ore Industry Overview

The iron ore industry has entities, which mine and sell iron ores and concentrates. The entities develop mine sites, mine and produce iron ore. Furthermore, there are entities, which produce other iron ore agglomerates and other beneficiation operations such as crushing, grinding, concentrating, leaching, etc.

Growth Drivers:

• Policies of governments: Various governments provide subsidies and support to the iron ore industry through public finance institutions. Governments also invite foreign direct investments in the industry.
• Rising construction activities: To combat the Covid-19 pandemic, various governments provided economic stimulus packages and initiated large scale infrastructure projects.
• Growth in emerging markets: Emerging markets, especially China and India, are expected to grow substantially over the coming years. Growth in emerging markets is likely to drive the growth of the iron ore industry.
• Rising automobile manufacturing: There is a rising demand for automobiles due to the growth in household disposable income in general for a large part of the population. Hence, there is increasing demand for steel and consequently for iron ores.

Opportunities:

• Large consumer population in developed countries: In the developed countries, the consumer population is growing, which could bring new opportunities to the iron ore market by rising demand for products derived from iron ore. Also, developed markets have established systems of iron ore mining.
• Rising urban population in developing countries: There is a trend of urbanisation in developing countries. It would bring further opportunity to the iron ore industry.

Risks:

• China reducing steel output: China is controlling its steel production to meet carbon emission norms. Any further curb by China could lead to lower demand for iron ores and a subsequent fall in iron prices.
• Fluctuating prices: The fluctuating price of iron ore could affect the margins of the Companies operating in the industry.
• Disruption in the supply chain: There could be disruptions in the supply chain due to the spread of the delta variant of Covid-19, which could disrupt the operations of companies in the industry.
• Rising interest rate: Many companies take debt to finance their exploration and production activities. Hence, any increase in interest rates could hamper their prospects.

Recent trend of dividend payments

  (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by FXPO from FY2017 to FY2020. In FY2021, FXPO would pay an interim dividend of USD 0.396 per share. It would be paid on 26 August 2021 and has an ex-dividend date of 12 August 2021.

Growth Prospects

• Economic stimulus packages from governments: To combat the Covid-19 pandemic, various governments provided economic stimulus packages and initiated large scale infrastructure projects. These led to rising demand for iron ore, which is likely to continue in future.
• Demand for high-grade products: The Company is shifting its production to high grade, high-quality iron ore products. High-grade products, such as iron ore pellets, provide the prospect of lowering carbon emissions to steelmakers. Hence, demand for FXPO’s products is likely to continue.
• Increased production volume: The Company made major investments in concentrate stockyard and concentrator expansion in FY2020. It resulted in rising production volumes for the Company.
• Low leverage: FXPO has very low leverage in its balance sheet, with a debt/equity ratio of 0.00x in H1 FY2021. Hence, it can easily raise cheap debt to fund its capital investments, if required.

Key Risks 

• China curbing steel output: China is controlling its steel production to meet carbon emission norms. Any further curb by China could lead to lower demand for iron ores and a subsequent fall in iron prices.
• Increasing freight rates: Any increase in freight rates could put pressure on the delivery cost, impacting the margins of FXPO.
• Disruption in the supply chain: There could be further disruptions in the supply chain due to the spread of the delta variant of Covid-19, which could disrupt the operations of the Company and increase costs.
• Adverse weather conditions: Adverse weather conditions could lead to disruption in projects and consequently time and cost overruns.
  

Now we will analyse some key fundamental and shareholders statistics of Ferrexpo PLC.

Recent Development 

China reduces steel output: On 10 August 2021, it came to light that due to China controlling steel production, its import of iron had dropped. It led to iron prices falling to a near three-month low. 

Financial and Operational Highlights (for the six months ended 30 June 2021 as of 4 August 2021)

(Source: LSE Website)

• Despite pelletiser upgrade work during H1 FY2021, pellet production reached the level of 5.6 million tonnes, similar to the H1 FY2020 level.
• The Company shipped 149 kilo tonnes of high-grade commercial concentrate related to its initiative of pelletiser upgrade work.
• Investment in higher pellet quality and favourable market conditions led to revenue rising 74% YoY in H1 FY2021.
• It resulted in underlying EBITDA surging 147% YoY and profit after tax rising 165% YoY in H1 FY2021.
• The impressive bottom line led to a net cash position reaching USD 213 million in H1 FY2021 from USD 4 million in FY2020.
• Driven by improved liquidity, FXPO increased capital investments to USD 142 million in H1 FY2021 from USD 96 million in H1 FY2020.

Financial Ratios (H1 FY2021)

 Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 11 August 2021, at 12:05 PM GMT, FXPO’s shares were trading at GBX 438.40, down by 2.79% against the previous day closing price. Stock 52-week High and Low were GBX 513.00 and GBX 147.41, respectively.

On a daily chart, FXPO's price is sustaining above 200-day EMA of about GBX 360.61 and 200-day SMA of about GBX 346.70, indicating the possibility of an upward movement. The stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last six months, FXPO’s stock has delivered a decent positive return of ~53.05%. Also, it has outperformed the FTSE All-Share Industrial Metals and Mining index with a return of about 33.44% and the FTSE 250 index with a return of about 18.55%.

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

Business Outlook Scenario

FXPO delivered an excellent performance in H1 FY2021, with revenue rising 74% YoY. Underlying EBITDA rose 147% YoY, and profit after tax surged 165% YoY in H1 FY2021. FXPO has almost zero leverage, with a debt/equity ratio of 0.00x, indicating financial flexibility to raise further debt, if required, at a cheaper cost to fund its capital investments. The Company could benefit from economic stimulus packages from governments, demand for high-grade products, its increased production volume and low leverage going into H2 FY2021. However, the management expects demand for iron ore to normalise from the H1 FY2021 record levels.

Considering the Company’s shift to high-grade iron ore products, its increased production volume, its continued investments, the better profitability, liquidity and leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Ferrexpo Plc at the current price of GBX 438.40 (as on 11 August 2021 at 12:05 PM GMT), with lower-double digit upside potential based on 3.46x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. Resistance level 2 is at 52 week high and if Ferrexpo Plc attains momentum or breach it, then target price as per valuation table could be seen in the near term as per technical chart analysis.

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

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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