Ferrexpo PLC

Ferrexpo Plc (FXPO) is a Swiss-based 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.

Q3 FY2019 Production Report (as on 8^th October 2019)
For the reported period, the company’s total pellet production increased by 1.7 per cent against the 9M 2018 total pellet production. For the 9M 2019, the production of high quality 65 per cent Fe pellets surged by 4.2 per cent against the 9M 2018.

Financial Highlights (for the six months ended 30 June 2019, US$ million)

(Source: Interim Reports, Company Website)

In the first half of the financial year 2019, the company’s sales volume increased by 4 per cent to 4,990 kt as compared with the corresponding period of the last year. The group’s reported revenue increased by 28 per cent to US$787 million as compared to US$617 million in H1 FY18, reflecting a surge in sales volumes and higher iron ore fines prices. The underlying EBITDA rose by 59 per cent to US$372 million against the previous year same period data, due to an increase in sales volumes. Profit after tax for the period increased by 78 per cent to US$270 million against US$152 million in H1 FY18, driven by lower interest expense and higher profit before tax and finance. Basic earnings per share (EPS) increased to US$45.9 cents as compared to US$25.9 cents in H1 FY18. The interim declared dividend per share rose by 100 per cent to US$6.6 cents, due to an increased capital investment and continued debt reduction. Net debt stood at US$282 million, a decrease of 24 per cent as compared to US$369 million in H1 FY18.

Share Price Performance

Daily Chart as at October-17-19, before the market closed (Source: Thomson Reuters)

On 17th October 2019, Ferrexpo PLC shares were trading at GBX 133.40 at the time of writing before the market close (at 3:00 PM GMT), down by 1.04% against the previous day closing price. Stock's 52 weeks High and Low are GBX 304.57/GBX 130. The company’s stock beta stood at 1.69, reflecting the higher movement of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The company might face macro headwinds with respect to higher commodity input prices, local inflation in the Ukrainian economy and the Brexit uncertainties. The business operations might be disrupted 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 has shown improvement in its top-line and bottom-line performance in the current half-yearly result. The company will be able to increase its production in the upcoming financial year. The company is focussed on utilizing its capital expenditure on the growth projects ranging between US$220 million to US$300 million. The company’s 2019 production volumes are in line with 2018 at 10.6 million tonnes approx. In some regions, presently steel demand is muted and reflecting weaker end-user demand and higher raw material costs. The company can maintain adequate capital allocation balance between a strong balance sheet, investment for growth and returns to shareholders.

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from $961 million in FY14 to $1,274 million in FY18. Compounded annual growth rate (CAGR) stood at 9.85 per cent.

Based on the above factors and supported by valuation done using the above method, we have given a “Buy” recommendation at the current price of GBX 131.96 (as on 17^th October 2019, at 8:30AM GMT) with lower double-digit upside potential, based on 0.9x NTM EV/ Sales multiple (approx.) on FY19E sales (approx.).
 

Pendragon PLC

London Stock Exchange-listed, Pendragon Plc is an online automotive retailer and engaged in the sale of a range of new cars, light motor vehicle, used cars, commercial vans, trucks and other motor vehicles.

Recent News
On 26^th September 2019, the company released that Richard Laxer, as a Non-Executive Director, had agreed to step down from the group with effect from 31st December 2019.

Financial Highlights (six months ended 30 June 2019, £million)

(Source: Interim Report, Company Website)

In the first half of 2019, the company’s reported revenue stood at £2,455.6 million, a decrease of 0.8% from the previous year same period data, while on LFL basis, the revenue increased by 2.9%, due to an increase in used revenue (up 3.9%), new revenue (up 1.7%), and aftersales revenue (up 3.2%). In software, the revenue increased by 6% and gross profit surged by 6.8%. In Leasing, the revenue increased by 4.9% and gross profit surged by 2.4%. In H1 FY19, basic and diluted loss per share stood at 9.3 pence against the 1.5 pence in H1 FY18. The net debt decreased by 17.3% to £104.3 millionas compared with the financial year 2018 of £126.1 million.

In Spite of challenging trading conditions in both new and used cars, the company franchised UK Motor provided like-for-like revenue growth of 2.6%. The US Motor group announced agreements for the disposal of two franchise locations (Newport Beach and Mission Viejo) for a combined consideration of £60 million. In August 2019, the company discussions for the disposal of the remainder of the United States Motor Group are ongoing, with the disposal of Puente Hills being declared for a total consideration of £17 million.

Share Price Performance

Daily Chart as at October-17-19, before the market closed (Source: Thomson Reuters)

On 17th October 2019, Pendragon PLC shares were trading at GBX 11.45 at the time of writing before the market close (at 2:25 PM GMT), down by 0.43% against the previous day closing price. Stock's 52 weeks High and Low are GBX 28.90/GBX 8.83. The company’s stock beta stood at 0.27, reflecting the lower movement of the stock as compared to the benchmark index.

Valuation Methodology

*Peers: Lookers PLC, Vertu Motors PLC, Marshall Motors Holdings PLC, Halfords Group PLC, and Cambria Automobiles PLC.

Conclusion
Market and economic conditions are challenging.The heightened Brexit and political uncertainty, as to both timing and outcome, is unfavourably affecting client confidence. During the second half of 2019, the outcome still reflects a meaningful recovery in profitability, based upon self-help actions that the company is taking as well as the assumption that current market conditions do not decline further. In its long-term plans, the group’s board will expand the Car Store used car business; optimise the Franchised UK Motor operation, maximising profitability and performance in used, new, and aftersales; continue the global expansion of the software business, Pinewood; and further grow the leasing business.

As compared to the peer group, the group’s stock is trading at a Price/Cash Flow of 4.5x, whereas industry median was 7.8x, which shows the stock is trading at a steep lower valuation in term of Price/Cash flow multiple.
Based on the above factors and supported by valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 11.10 (as on 17^th October 2019, at 10:30AM GMT) with lower double-digit upside potential, based on 4.24x NTM EV/ EBITDA multiple (approx.) on FY19E EBITDA (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.777893 GBP.

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