Investment Summary
 

1. Ferrexpo Plc is a premium product producer with a decent market share.

2. The company has a strong cash flow and competitive cash position.

3. The Group has a well invested asset base which benefits its business growth. Also, FXPO has a high quality and diverse customer base which reduces its risk elements.

4. It provides integrated logistical solutions to its clients, which reduces its costs.
 

Business Overview

Ferrexpo Plc (LON: FXPO) is a Swiss-based iron ore mining company which is involved in the iron ore pellets production, processing and export. The company’s assets are primarily located in Ukraine based Poltava region. The company serves its customers in Asia and Europe, including Japan, Vietnam, Turkey, Taiwan, Czech Republic, Germany, South Korea, China, Austria and Slovakia. Ferrexpo also carries out logistics operations and ore processing. The company is having an employee base of 11,157, including contractors. Presently, the company is the third-largest exporter of Pellets. The company for more than 40 years is engaged in the business of selling, processing and mining premium-quality iron ore pellets to the steel industry globally. The company has a solid logistics infrastructure of 150 barges, 2,252 rail cars and 22 Capesize ships.

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

Business Model

Ferrexpo’s business is to increase iron ore output using sustainable measures and focus on the development of its people by helping them to achieve full potential. The company is committed to becoming a reliable first-tier supplier of high-quality products for its global customer base.

Business Strategy


(Source: Company Website)

Ferrexpo is focused on positioning itself to achieve growth, operational optimisation, and maintaining governance with discipline. The company’s strategy is to produce high-quality pellets and export to premium steel mills globally. The group aims to become a low-cost, efficient producer, having a reliable infrastructure and logistics.

Key Markets


(Source: Company Website)

Ferrexpo sells its 49 per cent of pellets to the Central European market. In North-East Asia, the company sells 16 per cent of pellets to premium steel producers in South Korea and Japan. In the Western European market, the company sells around 15 per cent of pellets to its customers, based in Germany. Ferrexpo also sells around 12 per cent of pellets to premium steel producers based out of Taiwan and China. The company sells around 8 per cent of pellets to steel mills suppliers based in India, the Middle East and Turkey.

Logistics and marketing

Ferrexpo has logistics infrastructure transport pellets, primarily through own rail cars. The pellets are transported from mines in Poltava region to Ukraine’s western border, and from there it is connected with TIS Terminal and European rail network. The company ships around 1 million tonnes of pellets to customers in Central Europe through barge along the River corridor at Danube/Rhine. Based on the shorter shipping distance from Ukraine to Asia and Europe, the company deliver its products at competitive basis versus Brazilian pellet producers.

Products and processing


(Source: Company Website)

Strong Debt Reduction


(Source: Preliminary Presentation, Company Website)

The company has strongly reduced its net debt by $586 million since 31st December 2015. The company’s net debt to EBITDA (LTM) stood at 0.48x in the financial year 2019.

Recent News

On 31st January 2020, Ferrexpo announced that Ukrainian court had placed restriction in Poltava Mining. Ferrexpo AG Switzerland held 50.3% of the shares in Poltava Mining (FPM). The company has appealed against the order of the court and believes restriction is temporary.

Financial Highlights – Financial Year 2019


(Source: Preliminary Report, Company Website)

In the financial year 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 from 10,506 Kt in the FY2018. 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 from US$ 1,274 million in FY2018 to US$ 1,507 million in FY2019. Driven by increased sales volumes for the period, the underlying EBITDA went up by 17 per cent to US$ 586 million from US$ 503 million in FY2018. The company’s diluted earnings per share stood at 68.4 cents in the financial year 2019 as against 56.7 cents in the financial year 2018. 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 US$247 million.

Key Performing Indicators


(Source: Company Website)

The company’s revenue surged to USD 1,274 million in the financial year 2018 from USD 698 million in FY2007. The net debt in FY2018 reduced to USD 339 million from USD 394 million in FY2017. The dividend per share increased to 23.1 cents in FY2018 from 16.5 cents in FY2017, reflecting strong cash generation ability of the company.

Financial Ratios

 

The reported EBITDA margin in FY19 was 41.70 per cent against the industry median of 17.10%. The reported operating margin was 33.30 per cent for the FY19 period. Net margin reported was 26.8 per cent for the fiscal year 2019, higher from the industry median of 3.2%. Return on equity for the same period stood at 36.30 per cent. On the liquidity front, Ferrexpo Plc current ratio stood at 1.85x. On leverage front, the debt-equity ratio of the Ferrexpo Plc’s was 0.3 i.e. the company is less leveraged than the industry with debt-equity ratio of 0.40.

Share Price Performance


Daily Chart as on 25^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 25, 2020, at the time of writing (before the market close, at 8:55 AM GMT), Ferrexpo Plc shares were trading at GBX 131.71, up by 6.70 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 294.75/GBX 94.88. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.1626. The outstanding market capitalisation was around £713.45 million.

From the technical standpoint, 14 days-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)



To compare Ferrexpo Plc with its peers, Price/Earnings multiple has been used. The peers are Kaz Minerals Plc (NTM Price/Earnings was 4.70), Anglo American Plc (NTM Price/Earnings was 6.23), Chamberlin Plc (NTM Price/Earnings was 7.10) and Strategic Minerals Plc (NTM Price/Earnings was 0.14). The average of Price/Earnings (NTM) of the company’s peers was 4.54x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare Ferrexpo Plc with its peers, Price/Cash Flow multiple has been used. The peers are Bushveld Minerals Ltd (NTM Price/Cash Flow was 0.01), Kaz Minerals Plc (NTM Price/Cash Flow was 3.14), Anglo American Plc (NTM Price/Cash Flow was 2.89) and Glencore Plc (NTM Price/Cash Flow was 2.35). The Average of Price/Cash Flow (NTM) of the company’s peers was 2.70x (approx.)

Ferrexpo V/S FTSE-250 Price – 6 Months


(Source: Thomson Reuters)

In the last six months, Ferrexpo Plc share price has declined 19.02 per cent as compared to 25 per cent decline of FTSE-250 index, which shows that the stock has outperformed the index during the last six months.

Dividend Yield


(Source: Thomson Reuters)

Ferrexpo Plc has a dividend yield of 8.83 per cent, which is higher than the industry dividend yield of 7.81 per cent and lower than the sector dividend yield of 20.19 per cent.

Ferrexpo V/S Industry V/S Sector – 5 years


(Source: Thomson Reuters)

In the last five years, Ferrexpo Plc share price surged by 105.67 per cent while the industry grew by 53.24 per cent and sector decline by2.58 per cent.

Ferrexpo Total return- 5 years


(Source: Thomson Reuters)

In the last five years, Ferrexpo Plc has delivered a total return of 173.82 per cent while the FTSE All share index has delivered a total return of negative 4.954 per cent.

Growth and Risk Assessments

The company is the 3rd largest exporter of pellets and has maintained top-notch quality at a lower cost. The company sell its product to world-class customers, which include big giants from the steel industry. The company has well established internal control systems which help them to mitigate the risks associated with the working of the company. 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. Recent Coronavirus outbreak could hamper its supply chain and impact the business of the Group.

Conclusion

During 1Q 2020, the company has faced COVID-19 outbreak which has caused disruption to Chinese supply chains and impacting the distribution networks of steel producers and their customers. This could result in short-term volatility for the iron ore market. The Group expects that the Chinese economy would recover from the impact of COVID-19 virus, and normal supply chain operations would resume soon. The company has shown improvement in its top-line and bottom-line performance in the current FY2019 result. The group will be able to increase its production in the upcoming financial year. The company is focussed on utilizing its capital expenditure on the growth project ranging between US$220 million to US$300 million. In FY19, based on the healthy pricing of its 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.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from $961 million in FY15 to $1,507 million in FY19. Compounded annual growth rate (CAGR) stood at 11.90 per cent.

Based on decent fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 113.95 (as on 25th March 2020, before the market close at 10:45 AM GMT) with lower double-digit upside potential based on 4.54x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 2.70x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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