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.

Management

The current Non-executive Chairman is Steve Lucas and was appointed on November 28, 2016, as Chairman. Chris Mawe holds the responsibilities of Chief Executive Officer (acting) and was appointed on 25^th October 2019. Nikolay Kladiev is the current Chief Financial Officer.

Key Statistics



Top Shareholders

 

Iron Ore Market Dynamics


(Source: Company Website)
 
In the first half of the financial year 2019, 62% Fe price increased over USD 100 per tonne and resulted in supply disruptions. The iron ore supply is expected to increase in H2 of the financial year 2019. The CRU forecast for overall iron ore market is expected to remain deficit until 2021. Ferrexpo also follows international benchmark pricing.

Key Markets


(Source: Company Website)
 
Ferrexpo sells its 49 per cent of pellets to the Central European market, based on closer proximity and small-parcel delivery chain. Main customers are based out of Slovakia, Czech Republic and Austria. In North-East Asia, the company sells 16 per cent of pellets to premium steel producers in South Korea and Japan. The products are delivered through Capesize vessels at competitivecosts.In the Western European market, the company sells around 15 per cent of pelletsto its customers, based in Germany. Ferrexpo also sells around 12 per cent of pellets to premium steel producersbased out of Taiwanand China. The company sells around 8 per cent of pelletsto steel mills suppliers based in India, the Middle East and Turkey.

Pellet Exporters


(Source: Company Website)
 
In the year 2018, Ferrexpo stood as the third largest pellet exporter globally with 10.2 million tonnes followed by Vale and LKAB. The company’s global market share stood at 7.7 per cent for the period.

Business Model

Ferrexpo’s strategy is to increase iron ore output using sustainable measures and focus on the development of its people by helping them to achieve full potential. The company is committed to becoming a reliable first-tier supplier of high-quality products for its global customer base.

Business Strategy


(Source: Company Website)

Ferrexpo is focused on positioning itself to achieve growth, operational optimisation, and maintaining governance with discipline. The company’s strategy is to produce high-quality pellets and export to premium steel mills globally. The group aims to become a low-cost, efficient producer, having a  reliable infrastructure and logistics.

Logistics and marketing

Ferrexpo with its logistics infrastructure transport pellets, primarily through own rail cars. The pellets are transported from mines in Poltava region to Ukraine’s western border, and from there it is connected with TIS Terminal and European rail network. The company ships around 1 million tonnes of pellets to customers in Central Europe through barge along the River corridor at Danube/Rhine. Based on the shorter shipping distance from Ukraine to Asia and Europe, the company deliver its products at competitive basis versus Brazilian pellet producers.

Products and processing


(Source: Company Website)

Key Strengths

(a) Premium Product Producer

(b) Well diverse asset base with strong cash flow

(c) Large customer base with high quality

(d) The strong management team and strong product marketing

(e) Well-integrated logistics solution

(f) Significant resource base

Recent News

On 31^st January 2020, Ferrexpo announced that Ukrainian court had placed restriction in Poltava Mining. Ferrexpo AG Switzerland held 50.3% of the shares in Poltava Mining (FPM). The company has appealed against the order of the court and believes restriction is temporary.

Trading Update (FY 2019 and Pellet Production)

On 13th January 2020, Ferrexpo released an update for trading and production of pellet for the financial year 2019. The company continue to generate robust margins with around 16 per cent higher realised prices. The cash cost of production for C1 stood at USD 48 per tonne in FY2019 versus USD 43 per tonne in FY2018, driven by domestic inflation and a strong local currency. In the financial year 2019, the own ore’s pellet production stood at 10,519kt versus 10,506kt in FY2018. The own ore’s high quality 65% Fe pellets production increased by 3 per cent to 10,116kt for the period. The sales volumes in FY2019 stood at around 10,300kt versus 10,227kt in FY2018. The cash balance as on 31^st December 2019 was around USD 131 million versus USD 62 million in FY2018, with net debt of USD 282 million (approximately) for the period. The group announced a special dividend of 6.6 cents which reflects strong cash generation ability and balanced Board's strategy.

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 as against $151,666 thousand in H1 FY2018. The basic earnings per share increased from US 25.9 cents in H1 FY2018 to US 45.9 cents in H1 FY2019. The company’s diluted earnings per share stood at 45.8 cents in the first half of the financial year 2019 as against 25.8 pence in the first half of the financial year 2018. Driven by a debt reduction and an increase in capital investment, the interim dividend increased by 100 per cent to US$ 6.6 cents for the period. Capital investment in the H1 FY2019 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


(Source: Company Website)
 
The company has shown a solid financial track record. In the year 2018, total pellet production increased to 10,607 thousand tonnes from 10,444 thousand tonnes in FY2017. The own ore’s pellet production increased from 10,394 thousand tonnes in FY2017 to 10,506 thousand tonnes in FY2018. The company’s revenue surged to  USD 1,274 million in the financial year 2018 from USD 1,197 million in FY2017. The capital expenditure related to development activities increased to USD 69 million in FY2018 from USD 24 million in FY2017. The net debt in FY2018 reduced to USD 339 million from USD 394 million in FY2017. The dividend per share increased to 23.1 cents in FY2018 from 16.5 cents in FY2017, reflecting strong cash generation ability of the company.

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 32.4 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 in 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 4.7 per cent. On the liquidity front, Ferrexpo Plc’s current ratio was higher than the industry median of 1.64, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of FXPO was 0.34x, which was lower as compared to the industry median of 0.57x, reflecting that the company is less leveraged as compared to its peers.  

Share Price Performance


Daily Chart as at February-26-2020, before the market close (Source: Thomson Reuters)

On February 26, 2020, at the time of writing (before the market close, at 11:10 AM GMT), Ferrexpo Plc shares were trading at GBX 137.80, down by 2.96% against the previous day closing price. Stock's 52 weeks High and Low are GBX 294.75/GBX 115.99. Stock’s average traded volume for 5 days was 2,174,475.60; 30 days – 1,838,103.13 and 90 days – 2,375,850.40. The traded volume (average) for 5 days was up by 18.30 per cent versus 30 days average traded volume. The outstanding market capitalisation was around £830.90 million, with a dividend yield of 7.69 per cent.

From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was favourable, and prices could rise further from the current trading level.

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 Incus Investor ASA (NTM Price/Earnings was 3.27), Kaz Minerals Plc (NTM Price/Earnings was 4.79), United Company RUSAL Plc (NTM Price/Earnings was 4.30), Bushveld Minerals Ltd  (NTM Price/Earnings was 5.51) and Rio Tinto Plc (NTM Price/Earnings was 6.39). The average of Price/Earnings (NTM) of the company’s peers was 4.85x (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 0.02), Kaz Minerals Plc (NTM Price/Cash Flow was 3.76), Chamberlin Plc (NTM Price/Cash Flow was 3.98), Anglo American Plc (NTM Price/Cash Flow was 4.33) and Glencore Plc (NTM Price/Cash Flow was 4.16). The Average of Price/Cash Flow (NTM) of the company’s peers was 3.25x (approx.)

Valuation Metrics


(Source: LSE)
 
As on 31st January 2020, the Net Debt to Equity ratio of the Ferrexpo Plc’s was around 0.4x which was lower as compared with the Industrial Metals & Mining industry, which shows that the company is less leveraged than the respective industry.


(Source: LSE)
 
This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.
 
Ferrexpo V/S FTSE-250 Index Performance – 5 Years
 

(Source: Thomson Reuters)
 
In the last five years, Ferrexpo Plc share price has delivered 152.24 per cent return as compared to 18.35 per cent return of FTSE-250 index, which shows that the stock has outperformed the index during the last 5 years.
 
Dividend Yield


(Source: Thomson Reuters)
 
Ferrexpo Plc has a dividend yield of 7.67 per cent, which is higher than the industry dividend yield of 6.76 per cent and lower than the sector dividend yield of 20.16 per cent.

Ferrexpo V/S Industry V/S Sector – 5 years


(Source: Thomson Reuters)

In the last five years, Ferrexpo Plc share price surged by 118.46 per cent, which is significantly higher than the industry growth rate of 87.54 per cent and sector growth rate of 11.9 per cent.

Ferrexpo Total Return - 5 years


(Source: Thomson Reuters)

In the last five years, Ferrexpo has delivered a total return of 211.24 per cent while the FTSE-All share index has delivered a total return of 26.85 per cent.

Currency Chart
GBP VS USD


The current currency exchange rates for GBP to USD is 1.2988. (Source: Thomson Reuters)

EUR VS GBP


The current currency exchange rates for EUR to GBP is 0.8376. (Source: Thomson Reuters)

Growth and Risk Assessment

The company is the 3rd largest exporter ofpellets and has maintained top-notch quality 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. Over a period, the company might come across new kind of risks, based on the operations. The company might face macro headwinds with respect to higher commodity input prices, local inflation in the Ukrainian economy and the Brexit uncertainties. Disruption to the company’s 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.

Conclusion

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

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. 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. 

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 decent fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 137.50 (as on 26^th February 2020, before the market close at 9:10 AM GMT) with lower double-digit upside potential based on 4.85x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 3.25x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.77334 GBP.

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