Ferrexpo: Dividends and growth (stays BUY)
Despite a strong iron ore price and continued high pellet premiums, Ferrexpo has underperformed its iron ore peers in recent months, due to concerns over its corporate governance. While we acknowledge that the resignation of two directors and auditor Deloitte raises concerns amongst investors, we believe the recent underperformance presents a BUYing opportunity for Ferrexpo. With the full-year results, management committed to paying USD 160m in dividends for 2019E, if iron ore prices remain elevated (a 9.5% yield). Furthermore, Ferrexpo is accelerating its growth plans to boost production from the current c.10.6mt to 20mtpa ultimately, making Ferrexpo both a yield and a growth stock. Fundamentals for the iron ore pellets market are stronger than they were at the time of our initiation report, following the Vale tailings dam collapse. We see a risk of further negative newsflow surrounding recent governance concerns, so buying the stock is not without risk. However, we apply a 16% WACC to our Ferrexpo DCF for precisely these risks (vs. 14.35% previously) and see the current valuation as an acceptable entry point, given these concerns. As a result, we maintain our BUY recommendation, with a higher price target (PT) of GBp 303/share.Ferrexpo is an iron ore pellet producer. Co. produces, develops and markets its product for sale to the metallurgical industry. Co. operate two mines and a processing plant near Kremenchug in Ukraine, and an interest in a port in Odessa. Co. also owns logistics assets in Austria which operate a fleet of vessels operating on the Rhine and Danube waterways and an ocean-going vessel. Co.'s operations are integrated from iron ore mining through to iron ore concentrate and pellet production and subsequent logistics. Co.'s mineral properties lie within the Kremenchug Magnetic Anomaly and are being extracted at the Gorishne-Plavninskoye and Lavrikovskoye and Yeristovskoye deposits.
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