Famur – All Set To Brave Softer Demand
The inventory of hard coal held by Polish mines is increasing, and as prices of thermal and metallurgical coal fall worldwide this is putting downward pressure on the sales profits of domestic producers. This indicates tighter coal mine earnings next year, additionally weighed down by higher costs of labor, possibly prompting cutbacks in the industry's capital expenditures which, from the highest spend in seven years of PLN 5 billion seen in 2019, might decline to a projected PLN 4.4bn in 2020 (-12% y/y). Reduced mine investment means fewer bookings for mining equipment suppliers like Famur, whose revenue next year is expected by us to be 17% lower than this year at a projected PLN 1.8 billion, with EBITDA likely to post a 15% drop to PLN 469m. The negative impact of diminished volumes on sales margins should be mitigated by a higher share of aftermarket equipment and lower production costs thanks to declines in prices of steel and services, resulting in a higher 2020 EBITDA margin of 26.6% (+0.6 pp). Famur has a dominant position in the Polish market for mining equipment since the takeover of former rival Kopex in 2017, and as such we believe it can successfully navigate a more competitive environment. On our updated estimates, FMF stock is trading at a discount of about 16% to the 2019-2021E P/E and EV/EBITDA ratios of comparable companies. Even though it might take longer next year to collect payments from coal mine customers, Famur's FCF/EV ratio in 2020 and 2021 is expected to average 10%, and the respective dividend yields in the next two years might approximate 9% and 7%. After revising our 2020 and 2021 forecasts, we lower our target price for FMF from PLN 6.71 to PLN 5.33 per share but we maintain a buy rating for the stock.
FAMUR SA is a Poland-based manufacturer of mining equipment and machinery. The main area of the Company's operations is manufacture of automated longwall systems enabling the exploitation of coal. The Company also specializes in design and production of equipment for underground mines and open pits, as well as bulk material handling equipment and machines for coal preparation plants. The Company's products portfolio includes electric and hydraulic shearers, roof support, hydraulic control system, conveyors and crushers. FAMUR SA is also engaged in the development of information technology solutions and management system for coal industry. The Company operates through subsidiaries, based in Poland, Germany and the Russian Federation. The Company's major shareholder was TDJ SA, with a stake 71.28%. On November 27, 2014 the Company acquired 76,69% of stake in FAMAK SA.
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