EVRAZ Plc - Increased Sale for Iron Ore Products and Higher Crude Steel Output

EVRAZ Plc (LON: EVR) is a FTSE 100 listed international mining and steel Group. The Company’s operations are in the Czech Republic, Canada, Russian Federation, Italy, Kazakhstan and the USA.

On 30^th July 2020, the Company will release the trading update of Q2 FY20.

Recent News
On 19^th June 2020, the Group announced the appointment of Andrey Davydov, as a Vice President and Head of the Coal Division, and Leonid Kachur, as an adviser to the CEO (Chief Executive Officer).

First Quarter Trading Update (as on 30^th April 2020)

(Source: Presentation, Company Website)

In Q1 FY20, the Group reported an increase in the output by 3.2 per cent against Q4 FY2019, driven by capital repairs completion at EVRAZ NTMK. The total sales of steel products decreased by 10.4 per cent in Q1 FY20 as compared to the previous quarter (Q4 FY19), while semi-finished products sales declined by 15.3 per cent for Q1 FY20. Led by a decline in the seasonal demand from Russia in Q1, the Group has shown a decline in the sales of the finished products by 6.1 per cent. The production of raw coking coal also declined by 4.8 per cent in Q1 FY20 against the previous quarter (Q4 FY2019), reflecting weaker demand and lower level of production at Yuzhkuzbassugol mines. Due to maximising product shipments and higher sales volume in the Chinese region, the coking coal products External sales volumes surged by 30.4 per cent in Q1 FY20. The Group also witnessed an increase in oxide and FeV sales in Russian and Asian regions.  The iron ore External sales increased by 30 per cent in Q1 FY20, while the vanadium products sales declined by 9.9 per cent for the period, reflecting lower automotive industry demand.

Share Price Performance

1-Year Chart as at June-26-2020, after the market close (Source: Refinitiv, Thomson Reuters)

EVRAZ Plc’s shares closed at GBX 290.00 on 26^th June 2020, which was down 2.52% against the last day closing price. Stock 52 weeks High and Low are GBX 684.20 and GBX 200.60, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 50-day simple moving average prices, which reflects an upward trend in the stock.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 29^th May 2020, Price to Sales multiple of the EVR was 0.4x, and the corresponding multiple was lower than the Industrial Metal & Mining industry average, which means the Company is undervalued.

Risk Factors
In 2020, Pig iron production volumes are expected to decrease, and Iron ore pellet production volumes are expected to be slightly lower. In the fiscal year 2019, the Company's operations, as well as financial performance, declined and the production of almost all the commodities reduced due to tough economic conditions.

Conclusion
The Group sells the product to world-class customers, which include big giants from the steel industry. In Q2 2020, the Company anticipates that COVID-19 disruption will adversely affect the production of steel and pig iron in Russia. However, the Group has been consistently reducing the cash cost position across the steel plants and iron ore products, to stay resilient. In 2019, the Group witnessed a decent performance, with an increase in CAPEX. Moreover, the Company is well-positioned, and the remaining business performance remained robust.

Over the course of 4 years (FY15 - FY19), the Company's revenue surged from $8,767 million in FY15 to $11,905 million in FY19. Compounded annual growth rate (CAGR) stood at 7.95 per cent.

Based on the decent prospects and supported by valuation done using the above method, we have given a “BUY" recommendation at the closing price of GBX 290.00 (as on 26th June 2020) with lower double-digit upside potential, based on 10.80 NTM Price/Earnings multiple (approx.) on FY20E earnings per share (approx.).

Ferrexpo Plc – Increased in Sales and the Pellet Production from Own Ore

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.

On 7^th July 2020, the Group release the Q2 FY2020 production update.

Recent News
On 19^th June 2020, the Group has informed that a district court in Kiev, Ukraine has prohibited the transfer of the Ferrexpo’s 50.3 per cent stake in Ferrexpo Poltava Mining (FPM).

On 15^th June 2020, the board of directors announced an interim 2020 dividend per share of 6.6 US cents, which will be paid on 3 July 2020.

Trading Update
On 3^rd June 2020, the Group provided an update on the Annual General Meeting (AGM) along with the trading update (as of 30^th April 2020). In the trading update (Year to date 2020), the pellet production from own ore increased by 8.8 per cent to 3.8 million tonnes as compared with the corresponding period of the last year. In April 2020, the record pellet production from own ore of 1.06 million tonnes.   Year to date 2020 sales surged by 28 per cent to 4.1 million tonnes against the 3.2 million tonnes a year before in the same period. In pellet stocks, the Company anticipates a further reduction in the remainder of the second quarter of 2020. The Group has taken effective actions to protect the workforce and local communities against the impact of the COVID-19.

Share Price Performance
 
1-Year Chart as at June-26-2020, after the market close (Source: Refinitiv, Thomson Reuters)

Ferrexpo Plc’s shares closed at GBX 172.00 on 26^th June 2020, which was down 2.27% against the last day closing price. Stock 52 weeks High and Low are GBX 269.58 and GBX 92.57, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 50-day simple moving average prices, which reflects an upward trend in the stock.

Valuation Methodology

*1USD = 0.810186 GBP.

Valuation Metrics

(Source: LSE)

As on 29^th May 2020, the Price/Earnings and EV/EBITDA multiples of the FXPO were 3.3x and 2.5x, respectively, and the corresponding multiples were lower than the Industry Metal & Mining industry average, which means the Company is undervalued.

Key Risks
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 recent Coronavirus outbreak could hamper the supply chain and impact business performance.

Conclusion
The Chinese economy has recovered from the impact of COVID-19 virus and is back 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. The Group has a low-cost position compared to the peers with a well-invested asset base, which makes them a resilient player in the challenging market conditions. Furthermore, the Company can maintain adequate capital allocation balance between a strong balance sheet, investment for growth and returns to shareholders.
Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the closing price of GBX 172.00 (as on 26^th June 2020) and will recommend fresh buying at the right time.
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

* The “Buy” recommendation is valid for the current price as covered in the report as on 29th June 2020.

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