Famur: Right direction, but a long way to go (downgraded to HOLD)

We have downgraded Famur to HOLD, from Buy, and cut our price target (PT) to PLN 2.94/share (vs. PLN 5.14 previously), offering 8% upside. The pandemic has facilitated and accelerated the plans to close the Polish thermal coal mines, which poses a material challenge to Famur, as a coal mining equipment producer. It understands this challenge and is striving to diversify via M&A. We believe that its leading position in the Polish and Russian markets (>70% share) allows for FCF generation, which, combined with its strong balance sheet (2020E net cash/EBITDA of 0.6x, on our numbers) and its solid track record in M&A, should make this transition a successful one. At this stage, the market uncertainty related to COVID-19 and the Polish coal market outlook, and lower coal prices vs. 2018-19 could result in Famur’s EBITDA suffering a 2019-22E CAGR of -13% yoy, on our numbers. On the other hand, our expected FCF (2021-22E FCF yields of 13-10%), should allow it to distribute profits (we pencil in 6-9% dividend yields for 2021-22E), keeping its balance sheet position intact (2021-22E net cash/EBITDA at 1.1-1.3x). On our numbers, Famur trades at 2021-22E EV/EBITDAs of 3.7-4.0x, implying 69-56% discounts vs. its peers. Given the expected contraction of EBITDA, and its relatively high dependence on the thermal coal industry (c.75% of its top line, according to our estimates), we see the low multiples as justified.