Famur – No Profit Surprises To Unearth
Faced with the biggest coal glut since 2015 (7.1mmt), combined with weak demand due to the ongoing epidemic, the Polish mining industry is forced to rein in operations. In two cases, JSW and PGG, accounting for a combined 70% of domestic production, we have seen the coronavirus epidemic invoked as a force majeure event affecting contractual commitments. As they deal with falling earnings and hard access to bank financing, miners can be expected to scale back purchases of new equipment. The implications could be even more dire if the Polish government takes the drastic step of closing ailing coal mines; according to our estimates, the shutdown of loss-making operations owned by the state mining group PGG and the power utility Tauron would curtail Poland's coal capacity by 21%, in the process suppressing demand for mining equipment. JSW has cut this year's equipment purchases by 17% after burning through surplus cash. Under these circumstances, Famur, which in 2019 generated over 60% of total sales in Poland, after the postponement of PLN 361m-worth of deliveries to the Russian coal miner SUEK, most likely faces a 45% revenue slump in 2020, followed by contraction by a further 7% in 2021. On a positive note, Famur's current financial position is very healthy, leading us to expect a 2020 year-end net debt/EBITDA ratio o just 0.3x despite likely delays in payments from mining customers. Nevertheless the Company canceled this year's dividend distribution, and next year it is not likely to pay out more than 50% of annual profit. We revise our 2020 and 2021 EBITDA forecasts for Famur downward by 34% and 22%, respectively, and we see a number of downside catalysts for the Company's share performance in the near future, including job cuts, potential write-offs, decreasing profits, and news about planned mine closures. After taking this into account, we cut our target price for FMF from PLN 4.58 to PLN 2.20 per share, and we downgrade the stock two notches to hold.
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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