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Famur – 3Q19E results’ preview

In the past few weeks the performance of Famur’s equities had probably been negatively impacted by increasing risks of economic slowdown and the possibility the mining machinery sector may be headed toward a down-cycle. We understand why investors could have sought a risk-off strategy and we can imagine the equities had been underweighted. Nevertheless we think the extent of the strong price drop of the Company’s equities was strongly exaggerated, in our view. We believe that the equities of the Company constitute a screaming purchase opportunity (Buy + Overweight, 12M EFV of PLN 6.0 per share).

We believe that Famur’s equities have become relatively cheap looking purely EBITDA generation. Our understanding of the Company’s current EBITDA generating abilities is as follows. Firstly, we believe that the Company has the potential to deliver average LT mid-cyclical EBITDA of around PLN 500 million. Secondly, we assume that in optimistic years, at a time of mining machinery up-cycle, the Company can deliver EBITDA of as much as PLN 600 million. Conversely, we think that during down-cycle years, Famur is able of generating PLN 400 million of EBITDA. The extreme EBITDA estimates (PLN 600 million and PLN 400 million) correspond to net income estimates which, based on current market capitalization, translate into P/E forward multiples of 6x to 11x. We believe that such forward P/E levels are relatively undemanding for a high-quality, dividend paying private Company.

EBITDA visibility for 2020 is high – next year is likely to bring good EBITDA of no less than PLN 500 million, in our view. Famur’s impressive contract backlog assures as that the Company’s coming quarters are likely to be pretty good as far as 2Q20. Furthermore, unless anything changes, the current levels of ARA steam coal prices and the PSCMI index suggests that 2020 is likely to be another sound year for Polish miners and more domestic mining machinery contracts could appear for Famur in coming months (with a possible impact on 2H20 results). It should be remembered that the financial standing of both PGG and JSW continues to be far better than in the past years. Moreover, the mentioned miners have embarked on strong capex plans which may continue to be a driving force for Famur even beyond 2020. As regards the non-domestic market, we believe that any potential slowdown in the mining machinery sector would most certainly negatively impact the number of new export contracts already in 2020. Fortunately, Famur’s strong exposure to the Russian market (which is expected to grow at a high pace in 2020-2025) should clearly be a supportive factor. All in all, we assume in 2020 Famur will deliver EBITDA of PLN 500 million, even though we treat this estimate as a conservative one.

Even if were to assume the mining machinery sector enters a down-cycle it should prove to be a mild one for Famur, in our view. Trying to be conservative we assume the mining machinery sector will enter a slowdown phase in 2H20 which will negatively impact Famur’s consolidated figures in 2021. While we assume the Company’s EBITDA will drop to PLN 400 million in 2021, several arguments suggest that the potential slowdown in the mining machinery business would prove to be a rather mild one for the Company. Firstly, the situation of the Polish coal sector is structurally healthier than during the last down-cycle (while following the consolidation with Kopex, Famur is probably more capable of dealing with any slowdown). Secondly, we believe that the expected increase in mining machinery maintenance sales is likely to act very supportive in the next few years (a factor which was almost non-existent for export contracts a few years ago). Thirdly, we see strong potential for EBITDA improvement in the Company’s surface segment, especially if we look at the poor results in 2019.

Expected strong cash flow generation to support dividend payments. The Company delivered very impressive cash flow performance in 1H19. Our view, is that in both 2H19 and 2020 the Company will continue to surprise the market with strong cash flows backed by the gradual completion of mining contracts (please note that any business slowdown would additionally further improve cash flows based on positive NWC requirement changes). All this should act in support of high dividend payments in future years which we expect to remain at good yields of roughly 10% in both 2020 and 2021.