Ferrexpo PLC

Ferrexpo Plc (FXPO) is an iron ore mining company. It is involved in the production, processing and export of iron ore pellets. The company’s assets are established in the Poltava region of Ukraine. The company serves customers in Europe and Asia including Slovakia, Austria, China, South Korea, Germany, Czech Republic, Taiwan, Turkey, Vietnam and Japan. Ferrexpo also carries out ore processing and logistics operations.

Production for Q2 FY2019 and trading update
In Q2 FY19, pellet production increased by 11 per cent to 2.8MT as compared with the previous quarter. In H1 FY19, pellet production surged by 5 per cent to 5.4MT as compared to 5.1MT in H1 FY18. In H1 FY19, sales volumes expected to surge by around 4 per cent to 5.0MT as compared with the corresponding period of the last year. In 1H 2019, the company continued to generate strong cash flow driven by an increase of 29 per cent in the company’s average received price against the average FY 2018 price, due to the premiums for iron ore pellets and stronger iron ore prices. The average C1 cost of production for H1 FY19 expected to be around US$46 per tonne. On 30^th June 2019, net debt decreased to US$277 million as compared with the financial year 2018 of US$339 million.

Financial Highlights (FY2018, US$ million)

(Source: Annual Report, Company Website)

The company’s sales volume decreased by 2.3 per cent to 10,227kt as compared with the financial year 2017 of 10,467kt. The group’s reported revenue increased by 6.4 per cent to US$1,274 million as compared to US$1,197 million in FY17, reflecting higher production of pellets to 10.6 mt. The underlying EBITDA declined by 8.7 per cent to US$503 million against the previous year, due to higher costs and a decrease in sales volumes. The group’s underlying EBITDA margin stood at 39 per cent. Profit for the year decreased by 15 per cent to US$335 million against US$394 million in 2017, driven by an increase in sales prices and offset by higher production costs, and foreign exchange loss against the gain in FY17. Basic earnings per share (EPS) decreased to US$56.9 cents as compared to US$67.1 cents in the financial year 2017. The dividend per share rose by 40 per cent to US$23.1 cents, due to increased capital investment and continued debt reduction.

Share Price Performance

Daily Chart as at July-08-19, before the market closed (Source: Thomson Reuters)

On 8th July 2019, at the time of writing (before the market closed, GMT 11:45 AM), FXPO shares were trading at GBX 261 and increased by 0.85% against the previous day closing price. Stock's 52 weeks High and Low is GBX 305.60/GBX 134.34.

Valuation Methodology


Conclusion
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. 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.

The company had shown improvement in its top-line performance in the current financial year. Despite the company’s profitability had declined but it is still above the industry median. The company was able to increase its production in the current financial year.  The company is focussed on utilizing its capital expenditure on the growth project ranging between US$220 million to US$300 million.

Therefore, based on the above discussed measures and the valuation done using the above methodology, we have given a “Hold” recommendation at the closing price of GBX 258.80 (as on July 05, 2019), based on the 3.8x NTM Industry Median Price-to-cash flow (approx.) on the FY19E cash flow per share (approx.).

SIG PLC

SIG PLC (SHI) is a Sheffield, the United Kingdom-based distributor of building products in Europe. The group is involved in the supply of expert products to construction and related markets. The company’s business is differentiated into two segments: UK & Ireland and Mainland Europe.

Half Year Trading Update
The company’s like-for-like (LFL) sales decreased by 3.8 per cent over the period. The company revenues from continuing operations were 5.7 per cent lower in the period, with an adverse currency movement of 1.3 per cent and an impact from fewer working days of 0.6 per cent. The LFL sales decreased in the UK & Ireland segment, due to the falling level of construction activity as the Q2 progressed. The company's businesses in Mainland Europe reported a positive performance in the H1 FY19, with LFL revenues, increased by 3.3 per cent.

Financial Highlights (FY2018, £ million)

(Source: Annual Report, Company Website)

Based on an underlying operation, the company’s revenue reduced by 1.2 per cent to £2,683.2 million as compared with the financial year 2017 of £2,716.4 million, due to challenging market conditions and focus on profitability over volume. Gross margin surged by 50bps to 26.7 per cent against the 26.2 per cent in FY17. Profit before tax rose by 8.5 per cent to £75.3 million as compared to £69.4 million in FY17. Basic earnings per share increased by 8.1 per cent to 9.3 pence as compared with the previous year data. Return on sales (excl. property profits) increased to 3.3 per cent. Return on capital employed (post-tax) surged by 100bps to 10.3 per cent as compared to the last year data. Net debt stood at £189.4 million. Headline financial leverage (net debt/EBITDA) decreased to 1.7x as compared with the financial year 2017 of 2.3x.

Share Price Performance

Daily Chart as at July-08-19, before the market closed (Source: Thomson Reuters)

On 8th July 2019, at the time of writing (before the market close, GMT 1:10 PM), SHI shares were trading at GBX 124 and decreased by 1.12% against the previous day closing price. Stock's 52 weeks High and Low is GBX 154/GBX 101.30.

Valuation Methodology


Conclusion
The implications of the challenging economic environment and the continuing weak levels of market demand in the building and construction markets on the company’s revenues and profits, including macro-economic uncertainty due to Brexit.

Some additional risksare Delivery of the change agenda, Data quality, Market downturn, Supplier rebates, and Internal or external cyber-attacks could result in system disruption of loss of sensitive data.

The company had shown decent financial performance in the half-yearly results of the financial year 2019.The market environment in which company operate has low growth potential which can impact on company’s profitability. The company operates in multiple locations and any change in the economic and political policy can hamper the company’s operating performance.

Based on above valuation, we recommend investors to keep a cautious "Watch" on the stock at the closing price of GBX 125.40 (as on 5^th July 2019), with support from few catalysts needs to be evaluated at a later stage.
 

John Menzies PLC

John Menzies PLC (MNZS) provides time-critical logistics and support services and is located in Edinburgh, the United Kingdom. The company offers cargo and passenger ground handling services internationally. The company offer services to the global airline sector and, within the UK, to the travel and parcel markets. The company’s business is differentiated into two segments: Distribution and Aviation.

Trading Update (as on 5^th July 2019)
The company said that the trading across the group has been disappointing and that its first half was below expectations, reflecting the challenges faced by the aviation industry.

The group has implemented a cost-cutting programme that aims to save at least £10 million, most of which will be seen in 2020.

Recent News
On 10^th June 2019, the company was delighted to confirm that easyJet had awarded the group a new long-term ground handling contract at their home base in London Luton Airport. The contract will see Menzies handle across 24 thousand turns annually for the airline.

On 6^th June 2019,the company announced the selection of Giles Wilson as CEO (Chief Executive Officer) with an instant effect.

Financial Highlights (FY2018, £ million)

(Source: Annual Report, Company Website)

The company’s revenue from continuing operations stood at £1,291 million, an increase from the previous year data. While on a constant currency basis, revenue increased by 4 per cent. This improvement mainly resulted in surged cargo tonnage, an extra month of ASIG trading and solid de-icing performance in EMEA, realisation of synergies, and surged cargo forwarding volumes. Profit before tax rose from £9.9 million in FY17 to £21.6 million in FY18, while continuing underlying profit before tax increased to £44.1 million.

The reported loss for the year stood at £5.4 million as compared with the financial year 2017 profit of £12 million. The company’s underlying earnings per share for continuing operations climbed to 37.6 pence due to an increase in underlying profits and the lower tax rate. Basic and diluted loss per share from continuing and discontinued operations stood at 6.8 pence against the earning per share of 15.1 pence in FY17. The company’s board proposed a final dividend per ordinary share of 14.5 pence.

Share Price Performance

Daily Chart as at July-08-19, before the market closed (Source: Thomson Reuters)

On 8th July 2019, at the time of writing (before the market close, GMT 10:23 AM), MNZS shares were trading at GBX 410 and decreased by 0.73% against the previous day closing price. Stock's 52 weeks High and Low is GBX 668/GBX 353.50. The company’s stock beta stood at 0.56, reflecting lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Key Risks
Price Optimisation in Contract Renewals/Contract Tendering and Competitive Pressure; Impact of ‘Brexit’ to the UK and European Operations; Menzies Pension Fund; Increased Labour Costs and Staff Turnover; Data Breach/Data Protection Resource; and Global Act of Terrorism/Insider Threat.

Conclusion
The company forecasts that its full-year earnings will not exceed last year’s as challenges persisting in the industry, such as a decrease in cargo volumes and flight schedule reductions. The board reiterates that the medium- and long-term fundamentals of, and prospects for, the business are sound.

Although industry-wide disruption provided a tough working environment for the industry, the company was still able to post decent financials. Uncertainty around Brexit and the wider macro-economic environment has put pressure on the stock lately.

On the basis of above valuation, we recommend investors to keep a cautious "Watch" on the stock at the closing price of GBX 413 (as on 5^th July 2019), with support from few catalysts needs to be evaluated at a later stage.
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*Currency exchange rate taken for 1 USD = 0.80 GBP.

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