FERREXPO Tip: SPECULATIVE BUY Current price: 353.60 Target price: 450
Bullish points: - Lowly shares valuation
- Strong balance sheet
- High iron price
- Premiums paid on pellets likely to increase with stricter emission standards
- Strong ESG credentials
Bearish points: - Iron prices could fall back down to Earth
- Shareholder has a controlling stake
- Major litigation issues
- Political issues
In the latest interim results (on the 4th of August) , Ukrainian iron miner Ferrexpo saw profits rise to 661.426 million dollars or 482.841 million pounds using the dollar to pound conversion rate of 0.73. Nearly 500 million pounds in profit is a massive sum (not far shy of a quarter) in relation to Ferrexpo’s market cap of 2.08 billion pounds, even more impressive considering that profit was made in just half a year. It is also worth noting that these profits were on higher costs such as a 72% increase in freight costs. The group is also a strong cash converter with cash from operations standing at 660.58 million dollars, nearly a 100% conversion rate. As a result the net cash position soared to 213 million dollars despite the miner spending 93 million dollars making developments to their infrastructure. This allowed the board to pay out a 39.6 cents dividend, the company went ex - dividend on the 12th of August, meaning that adjusting for the dividend, I believe that the group will now have net debt / net cash 0.
Ferrexpo’s shares clearly look cheap against mining major Rio Tinto. Rio Tinto’s profit of 12.2 billion dollars (8.96 billion pounds) compared to the valuation of 86.91 billion pounds, meaning that Ferrexpo has a p/e of around half of that if Rio Tinto’s (if you compare the interim results.) Cash conversion and balance sheet were only slightly better for Rio. I am comparing Ferrexpo to Rio Tinto, as Rio derives the vast bulk of its earnings from iron, also since Rio Tinto is a massive company the valuation can be a proxy for what the sector deserves (or what the market thinks is deserves) since the larger the company the less likely the shares will be anonymously priced.
It is also worth noting that Ferrexpo sells high grade pellets instead of traditional iron ore. They can be more easily converted into steel and therefore can be sold at a premium. Ferrexpo’s pellets produce 40% less CO2 emissions than traditional sinter fines during the manufacturing of steel. As steel makers have to adhere to stricter emission standards the premiums can rise further, also the lower emissions of pellets are a plus for ESG credentials. The group is also building a 5MW solar facility and uses biofuel from the sunflower husk industry as fuel, another bonus for ESG, Ferrexpo has also been replacing diesel transport with electrical transport.
The reason why it is cheap, however is no secret. The company is constantly facing legal struggles over deals that were performed a very long time ago. These deals are mostly concerned around controlling stakeholder Zhevago. With his 50.3% stake Zhevago wields a lot of power over the company, and has entered many agreements with Ferrexpo, perhaps at the expense of minority shareholders. For example, Ferrexpo shareholders have found themselves with interests in football club AFC Vorska Poltava, which seems a bit odd keeping in mind Ferrexpo is a mining company, which is not very related to football, what’s more is that an international arrest warrant has been issued for Zhevago, putting the company into more uncertainty.
Ferrexpo have investors have good reason to be concerned about the issue with Zhevago, however the shares look very cheap and arguably Zhevago can in some ways help Ferrexpo, as he will benefit from Ferrexpo prospering. All in all Ferrexpo looks very cheap even if the iron prices come down from record highs, Ferrexpo is on a miserly p/e despite strong ESG credentials, a strong balance sheet and a strong cash conversion rate. Still the risks posed are huge so my price target of 450 is still a discount to the majors, I would recommend only buying a small amount until more of the legal issues have been resolved. SPECULATIVE BUY
CURRENT PRICE: 353.60 TARGET PRICE: 450
Bullish points: - Lowly shares valuation
- Strong balance sheet
- High iron price
- Premiums paid on pellets likely to increase with stricter emission standards
- Strong ESG credentials
Bearish points: - Iron prices could fall back down to Earth
- Shareholder has a controlling stake
- Major litigation issues
- Political issues
In the latest interim results (on the 4th of August) , Ukrainian iron miner Ferrexpo saw profits rise to 661.426 million dollars or 482.841 million pounds using the dollar to pound conversion rate of 0.73. Nearly 500 million pounds in profit is a massive sum (not far shy of a quarter) in relation to Ferrexpo’s market cap of 2.08 billion pounds, even more impressive considering that profit was made in just half a year. It is also worth noting that these profits were on higher costs such as a 72% increase in freight costs. The group is also a strong cash converter with cash from operations standing at 660.58 million dollars, nearly a 100% conversion rate. As a result the net cash position soared to 213 million dollars despite the miner spending 93 million dollars making developments to their infrastructure. This allowed the board to pay out a 39.6 cents dividend, the company went ex - dividend on the 12th of August, meaning that adjusting for the dividend, I believe that the group will now have net debt / net cash 0.
Ferrexpo’s shares clearly look cheap against mining major Rio Tinto. Rio Tinto’s profit of 12.2 billion dollars (8.96 billion pounds) compared to the valuation of 86.91 billion pounds, meaning that Ferrexpo has a p/e of around half of that if Rio Tinto’s (if you compare the interim results.) Cash conversion and balance sheet were only slightly better for Rio. I am comparing Ferrexpo to Rio Tinto, as Rio derives the vast bulk of its earnings from iron, also since Rio Tinto is a massive company the valuation can be a proxy for what the sector deserves (or what the market thinks is deserves) since the larger the company the less likely the shares will be anonymously priced.
It is also worth noting that Ferrexpo sells high grade pellets instead of traditional iron ore. They can be more easily converted into steel and therefore can be sold at a premium. Ferrexpo’s pellets produce 40% less CO2 emissions than traditional sinter fines during the manufacturing of steel. As steel makers have to adhere to stricter emission standards the premiums can rise further, also the lower emissions of pellets are a plus for ESG credentials. The group is also building a 5MW solar facility and uses biofuel from the sunflower husk industry as fuel, another bonus for ESG, Ferrexpo has also been replacing diesel transport with electrical transport.
The reason why it is cheap, however is no secret. The company is constantly facing legal struggles over deals that were performed a very long time ago. These deals are mostly concerned around controlling stakeholder Zhevago. With his 50.3% stake Zhevago wields a lot of power over the company, and has entered many agreements with Ferrexpo, perhaps at the expense of minority shareholders. For example, Ferrexpo shareholders have found themselves with interests in football club AFC Vorska Poltava, which seems a bit odd keeping in mind Ferrexpo is a mining company, which is not very related to football, what’s more is that an international arrest warrant has been issued for Zhevago, putting the company into more uncertainty.
Ferrexpo have investors have good reason to be concerned about the issue with Zhevago, however the shares look very cheap and arguably Zhevago can in some ways help Ferrexpo, as he will benefit from Ferrexpo prospering. All in all Ferrexpo looks very cheap even if the iron prices come down from record highs, Ferrexpo is on a miserly p/e despite strong ESG credentials, a strong balance sheet and a strong cash conversion rate. Still the risks posed are huge so my price target of 450 is still a discount to the majors, I would recommend only buying a small amount until more of the legal issues have been resolved. SPECULATIVE BUY
CURRENT PRICE: 353.60 TARGET PRICE: 450