Business Overview
Ferrexpo Plc (LON: FXPO) is a Swiss-based iron ore mining company which is involved in the iron ore pellets production, processing and export. The company’s assets are primarily located in Ukraine based Poltava region. The company serves its customers in Asia and Europe, including Japan, Vietnam, Turkey, Taiwan, Czech Republic, Germany, South Korea, China, Austria and Slovakia. Ferrexpo also carries out logistics operations and ore processing. The company is having an employee base of 11,157, including contractors. Presently, the company is the third-largest exporter of Pellets. The company for more than 40 years is engaged in the business of selling, processing and mining premium-quality iron ore pellets to the steel industry globally. The company has a solid logistics infrastructure of 150 barges, 2,252 rail cars and 22 Capesize ships.

The current Non-executive Chairman is Steve Lucas and was appointed on November 28, 2016, as Chairman. Chris Maweholds the responsibilities of the Chief Executive Officer and joined the group in 2008. Roman Palyvoda holds the responsibilities of Chief Financial officer.

Key Statistics



Top Shareholders

 
(Source: Thomson Reuters)

Recent News

On 2nd January 2020, Ferrexpo announced a special interim dividend of 6.6 cents (USD). The special dividend signifies the company’s ability for cash generation.

On 14th November 2019, Ferrexpo announced the selection of Mr Roman Palyvoda. Mr Palyvoda holds the responsibilities of Chief Financial Officer.

Production Update

On 8th October 2019, Ferrexpo announced a production update for the third quarter and nine months period of the financial year 2019. The total pellet production surged by 1.7 per cent to 7,891.39 thousand tonnes for 9M FY2019 versus 7,756.06 thousand tonnes for 9M FY2018. The total pellet production for Q3 FY2019 declined by 9.8 per cent to 2,538.89 thousand tonnes versus 2,813.80 thousand tonnes in Q3 FY2018. The company’s high-quality 65% Fe pellets production increased by 4.2 per cent for nine months period in the financial year 2019. As per the current market environment, the company expect its production for the full year to be in between 10.4 million tonnes to 10.6 million tonnes versus set guidance of 10.6 million tonnes.

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

(Source: Interim Report, Company Website)

In the H1 of the financial year 2019, the company’s sales volume surged by 4 per cent to 4,990 kt versus 4,798 Kt in the first half of the financial year 2018. The total pellet production surged by 5 per cent to 5,353 Kt in H1 FY2019 from 5,096 Kt in the H1 FY2018. Driven by higher iron ore fines prices and an increase in the sales volumes for the period, the group’s statutory revenue surged by 28 per cent from US$ 617 million in H1 FY2018 to US$ 787 million in H1 FY2019. Driven by increased sales volumes for the period, the adjusted EBITDA went up by 59 per cent to US$ 372 million from US$ 234 in H1 FY2018. The company’s adjusted EBITDA margin increased from 38 per cent in H1 FY2018 to 47 per cent in H1 FY2019. 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 $179,075 thousand in H1 FY2018.The company’s PAT (Profit after tax) surged by 78 per cent from US$ 152 million in H1 FY2018 to US$270 million in H1 FY2019. The PAT (Profit after tax attributable to the shareholders) stood at $269,435 thousand in H1 FY2019 versus $151,666 thousand in H1 FY2018. The basic earnings per share increased from US$ 25.9 cents in H1 FY2018 to US$ 45.9 cents in H1 FY2019. 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. Driven by a debt reduction and an increase in capital investment, the interim dividend increased by 100 per cent to US$ 6.6 cents for the period. Capital investment in the H1 FY2019 surged twice to US$114 million.

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 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 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

 

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 32.1 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 the financial year 2018, 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 4.7 per cent. On the liquidity front, Ferrexpo Plc’s current ratio was higher than the industry median of 1.77, 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 0.55x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance


Daily Chart as of  January 8^th, 2020, before the market close (Source: Thomson Reuters)

FerrexpoPlc shares were trading at GBX 157.65 at the time of writing before the market close (at 9:48 AM GMT) on 8^th January 2020 and were down by 0.60% versus the previous day closing price. Stock's 52 weeks High and Low are GBX 304.57/GBX 119.85. Stock’s average traded volume for 5 days was 1,804,076.00; 30 days – 2,097,023.83 and 90 days – 2,725,862.16. The traded (average) volume for five days was down by 13.97 per cent versus 30 days traded (average) volume. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 1.83. The outstanding market capitalisation was around £936.69 million, with a dividend yield of 6.89 per cent.The shares of the company have delivered a positive return of 7.77 per cent in the last quarter. The company’s stock has given investors 9.76 per cent of a positive return in the last month.

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 0.31), SidMa Steel Products SA(NTM Price/Earnings was 0.64), United Company RUSAL Plc(NTM Price/Earnings was 3.10), Kaz Minerals Plc(NTM Price/Earnings was 5.53) and EVRAZ Plc(NTM Price/Earnings was 7.18). The average of Price/Earnings (NTM) of the company’s peers was 3.35x (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 0.01), Tubos Reunidos SA(NTM Price/Cash Flow was 1.41), United Company RUSAL Plc(NTM Price/Cash Flow was 2.81), Kaz Minerals Plc(NTM Price/Cash Flow was 4.66) and Glencore Plc(NTM Price/Cash Flow was 4.76). The Average of Price/Cash Flow (NTM) of the company’s peers was 2.73x (approx.)

Growth and Risk Assessments

The company being the pellets’ 3rd largest exporter, has maintained its premium quality that too at low costs. The products are sold to world-class customers and big giants from the steel industry globally. The company has a strong balance sheet and has also maintained proper capital allocation for returns to shareholders and investment for growth. The internal control systems help the company to mitigate the risks and ensure adequate working with low latency rate. The company has operations in diverse regions due to which adverse exchange rate movements can impact the bottom-line numbers. Over a period, the company might come across new kind of risks based on the operations.

Conclusion

The company reported decent financial numbers with an increase in both top-line and bottom-line performance in the first half of the financial year 2019. 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 data 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 greater cash inflows. The group witnessed increased raw material costs and weaker demand from end-user in multiple regions where they have operations.

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 macro headwinds such as Brexit uncertainties, inflation in the Ukrainian economy and higher commodity input prices might negatively impact the operational performance and reduce financial performance as well. The strengthening of UAH vs the USD, the geopolitical situation in Ukraine, increased mining cost inflation in Ukraine, and weaker pellet premiums will cause disruption in the smooth running of operations in the company.

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from $961 million in FY15 to $1,274 million in FY18. Compounded annual growth rate (CAGR) stood at 9.85 per cent.
 
Based on fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 156.10 (as on 8^th January 2020, before the market close at 8:15 AM GMT) with lower double-digit upside potential based on 3.35x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 2.73x 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 = 0.76231 GBP.

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.