Key Investment Opportunities
 

1. Ferrexpo PLC (LON: FXPO) is an iron ore mining company, which is engaged in the business of producing, processing, and exporting of iron ore pellets to the steel industry globally.

2. FXPO assets are located in Ukraine based Poltava region and serving customers from Asia and Europe, including Japan, Vietnam, Turkey, Taiwan, Czech Republic, Germany, South Korea, China, Austria, and Slovakia.

3. The Group is identified as third-largest exporter of Pellets and also carries out logistics operations and ore processing.

4. Despite the COVID-19 mayhem, the production of iron ore pallet increased in the first quarter of 2020, which compelled the Board to announce final dividend for 2019. It depicts that the Group’s potential to trade well amid the challenging macro-economic situations.

5. The Group has a sizeable asset base to cater to a diverse customer portfolio at a competitive cost as compared to its peers. 

6. Ferrexpo PLC is well-positioned 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.

7. The Company has a solid logistics infrastructure of 150 barges, 2,252 rail cars and 22 Capesize ships and an employee base of over 11,200 professionals, including contractors.

8. Ferrexpo’s business is to increase iron ore output using sustainable measures and focus on the development of its people by helping them to achieve full potential.

9. Robust balance sheet with decent cash flow generation capabilities to drive shareholder returns.

10. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Ferrexpo PLC (LON: FXPO) is operating with a strong balance sheet position and low debt levels. It has 13 years track record of consistent operational performance.

Ferrexpo PLC is a FTSE 250 listed mining company, which produces iron ore pellet. The primary operations of the company are in the Poltava region of Ukraine. 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. The Group 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 11,200 people (including subcontractors). The Company launched its Initial Public Offering (IPO) on 15^th June 2007, and since then it is a constituent of London Stock Exchange. The Group has invested over USD 2.2 billion in the asset base since its IPO.

On 7^th July 2020, the Group will release its production report for Q2 FY2020, while on 28^th May 2020, it is likely to organize the annual general meeting.
 

(Source: Company Website)

Key Fundamental Statistics



Segments at a Glance

The FXPO Group is managed as a single business segment, which produces iron ore pellets for metallurgical industry. Geographically, customers are located in five regions – Central Europe, Western Europe, China & South East Asia, Turkey, Middle East & India and North East Asia and in these regions Ferrexpo sells around 49 per cent, 15 per cent, 12 per cent, 8 per cent and 16 per cent of pellets, respectively.


(Source: Company Website)
 
Key Performance Indicators - Non-Financial Performance Metrics in 2019
 

1. There was no fatality reported in 2019 as against one fatality in 2018. Moreover, the Group’s LTIFR (lost time injury frequency rate) reduced to 0.58x in 2019 as against 1.18x in 2018, reflecting a significant improvement.

2. The Group produced 10.5 Million Tonnes of own ore in 2019, which was slightly above the level of 2018.
 

The track record of financial indicators over the past 13 years can be seen below:
 
(Source: Company Website)

Significant Developments of 2020

1. 21^st April 2020:Considering the resilient performance, the Board of FXPO announced a final special dividend of 3.3 US cents per share for FY2019.

2. 7^th April 2020:The Group reported that Q1 2020 pellet production was increased by 7 per cent to 2.7 million tonnes and it was not impacted materially by Covid-19 mayhem.
 

Top Shareholders Statistics


 (Source: Refinitiv, Thomson Reuters)

Increased Production Volume with no Material Impact on Operational Performance (Q1 FY2020)
 

1. On 7^th April 2020, Ferrexpo released an update on the production for the first quarter of the financial year 2020. The pellet production surged by 7 per cent to 2.7 million tonnes in Q1 FY2020 versus 2.5 million tonnes in Q1 FY2019.

2. The 65% Fe pellets production increased by 9 per cent from 2.4 million tonnes in Q1 FY2019 to 2.7 million tonnes in the first quarter of the financial year 2020.

3. The sales in Q1 FY2020 is expected to be approximately 2.8 million tonnes versus 2.6 million tonnes in the Q1 of the financial Year 2019.

4. FXPO is focused on ensuring the health and safety of its employees and communities; Production in Q1 FY2020 was not impacted by coronavirus pandemic.
 

 
Financial Highlights – Healthy Free Cash Flow Generation for the year ended 31st December 2019


(Source: Annual Report, Company Website)
 

1. For the financial year ending 31^st December 2019, the company’s sales volume surged by 0.8 per cent to 10,312 kt versus 10,227 Kt in the financial year 2018. The total pellet production surged by 0.1 per cent to 10,519 Kt in FY2019 from 10,506 Kt in the FY2018.

2. Driven by higher iron ore fines prices and an increase in the sales volumes for the period, the group’s statutory revenue surged by 18 per cent from USD 1,274 million in FY2018 to USD 1,507 million in FY2019.

3. Driven by increased sales volumes for the period, the underlying EBITDA went up by 17 per cent to USD 586 million from USD 503 million in FY2018.

4. The company’s diluted earnings per share stood at 68.4 cents in the financial year 2019 as against 56.7 cents in the financial year 2018.

5. Driven by a debt reduction and an increase in capital investment, the dividend declared was US$ 13.2 cents for the period. Capital investment in the FY2019 period surged 83 per cent to USD 247 million.

6. The Group’s cash balance surged by 108 per cent to USD 131 million in FY2019 versus USD 63 million in FY2018.
 

Financial Ratios – Strong Profitability Margins versus the Industry Median
 
 

The reported Gross Margin, EBITDA margin, Operating Margin, Pretax margin and Net Margin stood at 61.4 per cent, 42.7 per cent 33.3 per cent, 30.5 per cent and 26.8 per cent, respectively, for the FY2019 and were higher than the industry median. The Return on Equity of 36.3 per cent in the financial year 2019 stood higher than the industry median of 6.6 per cent. On the liquidity front, Ferrexpo Plc’s current ratio was higher than the industry median of 1.69, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Ferrexpo Plc’swas 0.30x, which was lower as compared to the industry median of 0.39x.

Share Price Performance Analysis


Daily Chart as on 13^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 13, 2020, at the time of writing (before the market close, at 8:25 AM GMT+1), Ferrexpo Plc shares were trading at GBX 136.40, down by 0.94 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 269.58/GBX 92.57.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings (NTM) Approach



To compare Ferrexpo Plc with its peers, Price/Earnings multiple has been used. The peers are EVRAZ Plc (NTM Price/Earnings was 6.00), Kaz Minerals Plc (NTM Price/Earnings was 6.58), Anglo American Plc (NTM Price/Earnings was 7.23) and Bushveld Minerals Ltd (NTM Price/Earnings was 0.14). The Average of Price/Earnings (NTM) of the company’s peers was 5.00x (approx.).

Method 2: Price/Cash Flow (NTM) Approach



To compare Ferrexpo Plc with its peers, Price/Cash Flow multiple has been used. The peers are EVRAZ Plc (NTM Price/Cash Flow was 3.74), ArcelorMittal SA (NTM Price/Cash Flow was 3.20), Glencore Plc (NTM Price/Cash Flow was 2.71) and Bushveld Minerals Ltd (NTM Price/Cash Flow was 2.54). The Average of Price/Cash Flow (NTM) of the company’s peers was 3.05x (approx.).

Valuation Metrics


(Source: London Stock Exchange)
 
As on 30^th April 2020, the EV/EBITDA multiple of the Ferrexpo Plc’s was around 2.0x, which was lower as compared with the Industrial Metals & Mining industry. It reflects, shares are undervalued against its industry multiple. 

Ferrexpo Plc Vs FTSE-Mid 250 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Ferrexpo Plc share price has delivered 97.43 per cent return as compared to negative 10.66 per cent return of FTSE-mid 250 index, which shows that the stock has outperformed the index during the last five years.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)

Ferrexpo Plc has delivered a total return of 139.30 per cent in the last five years versus the total return of FTSE All share of 5.93 per cent for five years period.
 
Industry Outlook

In 2019, the Global steel production was increased by 3 per cent to 135 million tonnes as compared to 140 million tonnes in 2018. However, the market also observed high input cost and weak steel demand, which affected the profitability of the steel mill. Europe and China were the largest importers of pallets in 2019 with 34 million tonnes and 31 million tonnes, respectively. It reflected 63 per cent growth in China import as compared to 2018. As per the Acumen Research and Consulting report (published in January 2020), the market size of global iron ore pellets is projected to worth around USD 98.2 billion by 2026, which is reflecting a CAGR of around 5.1 per cent during the forecast period 2019 to 2026.

Growth Prospects and Risk Assessment

The Company is the 3rd largest exporter of pellets and has maintained top-notch quality at a lower cost. FXPO sell its products to world-class customers, which include big giants from the steel industry. The Group has well-established internal control systems, which help them to mitigate the risks associated with the working of the company. 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. Recent Coronavirus outbreak could hamper its supply chain and impact the business of the Group.

Business Outlook Scenario

The Company has shown improvement in its top-line and bottom-line performance in the current FY2019 results. The Group will be able to increase its production in the upcoming financial year. FXPO is focussed on utilizing its capital expenditure on the growth project ranging between US$220 million to US$300 million. In FY19, based on the healthy pricing of its high-quality iron ore pellets, the group 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 can maintain adequate capital allocation balance between a strong balance sheet, investment for growth and returns to shareholders.

During 1Q 2020, the company has faced COVID-19 outbreak, which has caused disruption to Chinese supply chains and impacting the distribution networks of steel producers and their customers. This resulted in short-term volatility for the iron ore market. The Chinese economy has recovered from the impact of COVID-19 virus and isback to normal supply chain operations. The global operations are now witnessing the impact of covid-19, and global markets have experienced a sharp decline as production activities are halted. The Group has taken necessary measures to support business continuity and tackle uncertain times. FXPO has a competitive cost position with an extensive customer portfolio; moreover, the barriers to entry in the market makes them competitive even in the future. The Group has a low-cost position compared to its peers with a well-invested asset base, which makes them a resilient player in the challenging market conditions.

Over the course of 3 years (FY16 - FY19), the company's revenue surged from $986.3 million in FY16 to $1,560.7 million in FY19. Compounded annual growth rate (CAGR) stood at 15.17 per cent.

Based on the decent growth trajectory and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 134.10 (as on 13^th May 2020, before the market close at 8:20 AM GMT+1), with lower-double digit upside potential based on 5.00x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 3.05x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.). 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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