Ferrexpo PLC (LON: FXPO)

Ferrexpo PLC (LON: FXPO) is a FTSE 250 Index listed iron ore pellet producer 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. It 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. In 2019, it produced 10.5 million tonnes of pellets which made it the third-largest exporter of pellets to the global steel industry.  

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

The Company has invested over US$2.3 billion in production and mining since the IPO in 2007. As a result, it has a strong market reputation with a diversified sales portfolio to provide business resilience. Moreover, it is a low-cost producer and stays cash flow positive through the commodity cycle. Overall, the Company has a well-invested production process, skilled workforce, global logistic capability, and long-standing customer relationships, which ensures financial stability. Therefore, it is the third-largest exporter of pellets to the global steel industry and has a sizeable asset base for catering to a diverse customer portfolio at a competitive cost as compared to peers.

 (Source: Company Filings, chart created by Kalkine Group)

During H1 FY20, the Company delivered a resilient financial performance with increased production volumes and sales, despite unprecedented global disruption. The pellet sales and production volumes surged (year-on-year) by 22% and 5%, respectively. Subsequently, the interim dividend was maintained at 6.6 US cents (flat against H1 FY19). Meanwhile, net debt to last 12 months’ EBITDA ratio decreased to 0.31x, as compared to 0.48x on 31 December 2019. Moreover, it has increased the closing cash to US$169 million as of 30 June 2020 (on 30 June 2019: US$92 million), which reflects a strong liquidity position as well. Further, FXPO aims to double the output in Ukraine over the medium term.

 (Source: Company Filings, chart created by Kalkine Group)

Regarding the risk factors, the Company’s performance is subject to various kinds of risk, such as macro headwinds pertinent to higher commodity prices, and increasing freight rates can put pressure over the delivery cost. Moreover, the location inflation in the Ukrainian economy and Brexit causing further uncertainties to operating cost. Amidst Covid-19 scenario, production stoppages and equipment failures can also impact the performance. Adjacently, declining iron ore prices can affect profitability and cash generation. There is also a risk to supply chain due to resurgence of coronavirus cases. 

Industry Outlook Dynamics

The realised iron ore prices were affected by the battered global demand during H1 FY20, which can affect profitability. However, 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.

Key Fundamental Statistics

A Glimpse of Business Segments

(Source: Annual Report, Company Website)

Recent Developments

On 6 October 2020, Ferrexpo announced the dismissal of restriction by the district court in Kyiv on covering 50.3% shares in FPM (Ferrexpo Poltava Mining) held by Ferrexpo AG Switzerland.

Key Shareholders Statistics

Key Performance Indicators

(Source: Annual Report, Company Website)

Production Update for Q3 FY2020 (released on 6 October 2020)

• In the third quarter of the financial year 2020, Ferrexpo announces its operations were not materially impacted by the covid-19 and ensured that all precautions are followed for the wellbeing of the workforce.
• The pellet production surged by 3% for nine months period to 8.1MT, while pellet production declined by 12% in Q3 FY2020, due to planned pelletiser maintenance in September.
• The 100% of production comprised of iron ore pellets with a high grade in Q3 FY2020 and completed additional concentrator section during the period.

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company witnessed higher sales and production, strong cash generation, lower C1 cash costs and debt, and solid underlying EBITDA.
• The revenue for H1 FY2020 declined by 1% year-on-year to US$776 million, due to a lower realised average free on board (FOB) price in H1 FY20, which was partly offset by a significantly higher pellets sales volume.
• Due to a lower outstanding debt balance, the interest expense reduced by 49% year-on-year to US$8 million in H1 FY2020.
• The Company witnessed a strong balance sheet position with a lower level of debt. The Company has decreased net debt to US$174 million and increased cash to US$169 million as on 30 June 2020.
• Net cash flow from operating activities for the first half of FY2020 increased to US$258 million (1H FY19: US$256 million). The Board has declared an interim dividend of 6.6 US cents.

Financial Ratios – Strong Profitability & Liquidity Position versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 stood higher than the industry median, reflecting higher revenue 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 18.7% was higher as compared to the industry median of 2.1%. On the liquidity front, Ferrexpo Plc’s current ratio was higher than the industry median of 1.82x, reflecting sufficient current assets to pay the short-term obligations. On leverage front, the debt-equity ratio was 0.26x, which was lower as compared to the industry median of 0.57x, reflecting that the company is less leveraged as compared to the industry.  

Share Price Performance Analysis

(Source: Refinitiv, chart created by Kalkine Group)

On 7 October 2020 (before the market close, at 9:28 AM GMT+1), Ferrexpo Plc shares were trading at GBX 168.40, and remained flat against the previous day closing price. Stock 52-week High was GBX 206.54 and Low of GBX 90.02, respectively.

From the technical standpoint, shares were trading above the short-term support level of 200-day (GBX 154.70) simple moving average price, which reflects an uptrend in the stock.

14-day RSI is currently supporting an upside move (around 38 level), which means the stock price could increase in the short term.

 (Source: Refinitiv, chart created by Kalkine Group)

In the last one year, Ferrexpo Plc share price has delivered ~18.84% return as compared to ~ negative 8.20% return of FTSE-250 index, which shows that the stock has outperformed the index during the one years.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

(Source: Refinitiv, chart created by Kalkine Group)

Business Outlook Scenario

The Company continued to operate in Q3 FY20 without any material impact due to the Covid-19 pandemic, and therefore, pellet production for 9M FY20 was up by 3% to 8.1MT (9M FY19: 7.9MT). In September 2020, the Company also announced a special interim dividend of 6.6 US cents following the interim dividend of 6.6 US cents, which reflects the Company’s robust cash generation, attractive shareholder return, balance sheet strength, and investment in growth opportunities. As the demand remained strong for iron ore pellets, Ferrexpo continued to perform well.

Inevitably, the associated uncertainties of the Covid-19 pandemic will persist for a prolonged period. However, the Company is encouraged by the Q3 FY20 and H1 FY20’s performance as it has successfully navigated through the first phase of the Covid-19 outbreak. Although the steel markets recovery in Japan and Europe will be slower than in China, the competitive cash position on the iron ore cost curve shall provide resilience to adverse market conditions. Furthermore, the Company has adopted well to a changing market environment as it sold higher volumes to China where demand remains robust. It is anticipating a demand recovery outside China as the market returns to more normal conditions in H2 2020. Therefore, it is confident that it will be able to redirect pellet sales in the respective markets with favourable demand dynamics.

Considering the improved financial performance, decent ROE and support from the valuation as done using the above method, we have given a “Buy” recommendation on Ferrexpo Plc at the current price of GBX 168.40 (as on 7 October 2020, before the market close at 9:28 AM GMT+1), with lower double-digit upside potential based on 3.40x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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