Ferrexpo PLC (LON: FXPO) – Robust Production Boosted Sales Volume in H1 FY20 Despite Covid-19 Mayhem

Ferrexpo PLC is a FTSE 250 listed producer of iron ore pellet with mines in Ukraine (Poltava region) and sales operations internationally. 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 11,292 people (including subcontractors). The Company launched the Initial Public Offering (IPO) on 15 June 2007, and since then it is a constituent of London Stock Exchange. The Group has invested over US$2.3 billion in production and mining facilities since 2007.

On 5 August 2020, the Company is expected to announce the H1 FY20 results, while the Q3 FY20 production report is likely to be released on 6 October 2020.


 (Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the recent report from Global Market Insights, the market size for Global iron ore pellets market is projected to reach nearly US$70 billion by 2026, representing a compounded annual growth rate of 3.2% between 2020 to 2026. The key drivers for the market growth include - Increasing adoption of iron-based chemicals, Growing product consumption across MEA (the Middle East and Africa) region, and Rising awareness regarding the reduction of carbon emissions from steel plants.

Growth Prospects and Risk Assessment

The Company is the third-largest exporter of pellets and has maintained top-notch quality at a lower cost. FXPO sells products to world-class customers, which include big giants from the steel industry. The Group has a well-established internal control system, which helps them to mitigate the principal risks. Also, the Company is a low-cost producer and stay cash flow positive through the commodity cycle. Overall, the Group has a well-invested production process, skilled workforce, global logistic capability, and long-standing customer relationships, which ensures financial stability to the Company.


(Source: Presentation, Company Website)

However, the Company might face macro headwinds with respect to higher commodity input prices, local inflation in the Ukrainian economy and the Brexit uncertainties. Moreover, the increase in freight rates can also put pressure on the delivery cost. Furthermore, the performance is also dependent on the production stoppages and equipment failures. Also, the decline in iron ore prices can impact the cash generation and profitability of the Company. Recent Coronavirus outbreak could hamper the supply chain and impact the business of the Group.

Segment Analysis

The Group operates through 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 they contributed around 36%, 13%, 30%, 5% and 16%, respectively, in terms of FY19 sales volume by market region.


 (Source: Annual Report, Company Website)

Synopsis of Recent Developments – Strong Trading Attracted Lucrative Dividends

7 July 2020: The Company reported that the infection rate in local communities of their location remains low, and thus in H1 FY20 pellet production was up 5% to 5.6MT (H1 FY19: 5.4MT), and H1 FY20 sales volumes increased by around 21% to 6.1MT (H1 FY19: 5.0MT). The higher sales have been driven by de-stocking and robust production performance. Moreover, increased sales in Asia offset the weaker demand in Europe.

15 June 2020: The Company affirmed that it continues to perform strongly, and therefore, announced the interim dividend of 6.6 US cents, which was paid on 3 July 2020.

Key Performance Indicators - Non-Financial Performance Metrics in 2019

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

(Source: Presentation, Company Website)

Moreover, the Company has a solid track record of KPI performance over the past 13 years, which can be seen in the image below:

 
(Source: Company Website)
 

Top Shareholders Statistics

 

Production Update for Q2 and H1 of the Financial Year 2020 (7^th July 2020)
 

All the facilities of the Group continues to operate without any material impact on the operations. The infection rate in the region where the Company operates is on the lower side. The Company maintained decent safety performance indicators in the financial year 2020 with zero fatality in the first half of FY2020 and lost time injury frequency rate remained below 1.0x for the period. The pellet production in the second quarter of FY2020 surged by 5 per cent to 2.9MT (Q1 FY2020 2.7MT) and production in H1 FY2020 improved by 5 per cent to 5.6MT (H1 FY2019: 5.4MT). Reflecting de-stocking, the Group’s sales volumes increased by around 21 per cent to 6.1MT in H1 FY2020 (H1 FY2019: 5.0MT).

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


(Source: Annual Report, Company Website)
 
For the financial year ending 31st 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 (FY2018: 10,506 Kt). 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 to USD 1,507 million in FY2019 (FY2018: USD 1,274 million). Driven by increased sales volumes for the period, the underlying EBITDA went up by 17 per cent to USD 586 million in FY2019 (FY2018: USD 503 million).

The company’s diluted earnings per share stood at 68.4 cents in the financial year 2019 (FY2018: 56.7 cents). 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. 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 

Reported profitability metrics for the financial year 2019 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Ferrexpo Plc has delivered a substantial return for the shareholders’ as Return on equity of 36.3% was higher as compared to the industry median of 6.2%. On the liquidity front, Ferrexpo Plc’s current ratio was higher than the industry median of 1.81, reflecting sufficient liquidity to meet short-term obligations and shows a robust liquidity profile to tackle the uncertainty due to covid-19 outbreak. On leverage front, the debt-equity ratio was 0.30x, which was lower as compared to the industry median of 0.41x, reflecting that the company is less leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 15^th July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 15, 2020, at the time of writing (before the market close, at 11:01 AM GMT+1), Ferrexpo Plc shares were trading at GBX 186.10, up by 2.31 per cent against the previous day closing price. Stock 52 week High was GBX 258.44 and Low of GBX 92.57, respectively.

Bullish Technical Indicator

From the technical standpoint, shares were trading well above the short-term support level of 10-day, 20-day and 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology - Price/Earnings (NTM)



1 USD to GBP: 0.79196

To compare Ferrexpo Plc with peers, Price/Earnings multiple has been used. The peers are BHP Group Plc (NTM Price/Earnings was 11.56), Kaz Minerals Plc (NTM Price/Earnings was 5.80), Rio Tinto Plc (NTM Price/Earnings was 3.36), Strategic Minerals Plc (NTM Price/Earnings was 3.14) and Bushveld Minerals Ltd (NTM Price/Earnings was 2.64). The Average of Price/Earnings (NTM) of the company’s peers was 5.30x (approx.).

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


(Source: Refinitiv, Thomson Reuters)

In the last five years, Ferrexpo Plc share price has delivered 255.93 per cent returns as compared to negative 1.83 per cent returns of FTSE-mid 250 index, which shows that the stock has outperformed the index during the last five years.

Business Outlook Scenario

The Group has shown an improved level of production in the second quarter and the first half of the financial year 2020 and sales volumes increased significantly by 21%. The Company has shown improvement in top-line and bottom-line performance in the FY2019. The Company is focussed on utilizing capital expenditure on the growth projects ranging between US$220 million to US$300 million. In FY19, based on the healthy pricing of 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. The Company’s operations were not materially impacted by the outbreak of covid-19 pandemic and have successfully implemented complete Covid-19 protocols for all operations at all locations.

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 prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 186.10 (as on 15 July 2020, before the market close at 11:01 AM GMT+1), with lower-double digit upside potential based on 5.30x Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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