Overview
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. The company is having an employee base of 11,157, including contractors. 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 current Non-executive Chairman is Steve Lucas and he 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 30th September 2019, Mr Zhevago responded to the allegations made against him on social media. As per the allegations he has been serving suspicion notice involving an investigation relating to a business owned by him till 2015 in Ukraine. In Response, Mr Zhevago denied any allegations and has not received any suspicion notice.

Financial Highlights – H1 Financial Year 2019 (30^th June 2019, US$, thousand)
 

(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 period. 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 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 declared dividend 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 period surged twice to US$114 million.

Strong Debt Reduction

 

(Source: Investor Presentation, Company Website)

The company has strongly reduced its net debt by $586 million since 31^st December 2015. The company’s net debt to EBITDA (LTM) stood at 0.44x in the first half of the financial year 2019. The company is targeting to reduce net debt further in the second half of the financial year 2019.

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 debt levels in relation to profitability. In FY 2018, net debt to underlying EBITDA decreased to 0.67x as against 0.72x for the FY2017 period.
 

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 up 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 driven by higher commodity input prices, local inflation and increased mining and maintenance activity.


Sales by Region

The sales in the geographic region of 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 has 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
  


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 FY2019, 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 stood at 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 Oct-1-19, after the market closed (Source: Thomson Reuters)

On 1 October 2019, (after the market closed), Ferrexpo Plc shares ended at GBX 164.30, up by 1.95per cent against its previous day closing price. Stock's 52 weeks High and Low are GBX 304.57/GBX 157.25. Stock’s average traded volume for 5 days was 2,531,028.60; 30 days – 2,319,805.20 and 90 days – 1,945,113.30. The traded volume (average) for 5 days was up by 9.11 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 1.67. The outstanding market capitalisation was around £948.65 million, with a dividend yield of 6.78 per cent.

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


To compare Ferrexpo Plc withits 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 3.10), Kaz Minerals Plc(NTM Price/Earnings was 3.56) and EVRAZ Plc(NTM Price/Earnings was 5.90). The average of Price/Earnings (NTM) of the company’s peers was 2.70x (approx.)

Method 2: Price to Cash Flow Approach (NTM)


To compare FerrexpoPlc withits 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 2.27), Anglo American Plc(NTM Price/Cash Flow was 2.52) and Kaz Minerals Plc(NTM Price/Cash Flow was 3.50). The Average of Price/Cash Flow (NTM) of the company’s peers was 2.20x (approx.)

Growth Prospects and Risks Assessment

The company is the 3rd largest exporter ofpellets and has maintained top-notch quality at a lower cost. The company sells its products 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. Over a period, the company might come across internal and external risks based on the business operations – lower iron ore prices, pellet premiums and supply, seaborne freight rates, operating risks and hazards (mining processing and logistics), health and safety risks, Ukraine country risk, counterparty risk, etc.

Conclusion

The company hasshown improvement in its top-line and bottom-line performance in the current half-yearly result. The company will beable to increase its production in the upcoming financial year. The company is focussed on utilizing its capital expenditure on the growth projects 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.

In H1 FY19, based on the healthy pricing of its high-quality iron ore pellets, the company continued to be in the profitable zone with decent 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 business operations might be disrupted 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.

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from $961 million in FY14 to $1,274 million in FY18. Compounded annual growth rate (CAGR) stood at 9.85 per cent.
 
Based on the fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 164.30 (as on 1st October 2019) with high single digit upside potential based on 2.70x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 2.20x 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 = 0.8145 GBP

*The “Buy” recommendation is valid for the current price as covered in the report (as on 02-October-19).

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.