Over the past two years, shares in Ferrexpo (LSE: FXPO) have been on a wild ride. After peaking at a high of just under 500p during 2011, shares in the Ukrainian iron ore miner collapsed to a low of 16p at the end of 2015. But then, in what has to be one of the most breathtaking turnarounds ever seen, the shares rallied by around 900% from the 2015 low to a high of 160p. This is still around 70% below the all-time high but the company’s fortunes have significantly improved over the past 12 months.
Even after these gains, it looks as if they could be further upside ahead for shares in Ferrexpo.
A comeback story
Shares in Ferrexpo plunged to their all-time low of 16p at the end of 2015 for many different reasons. The company was yet another casualty of the commodity price slump and to add insult to injury, investors were concerned about the impact the Ukrainian civil war might have on operations.
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If these issues weren’t enough, towards the end of the third quarter of 2015, the company announced that its transactional lender, Bank Finance & Credit JSC, was declared insolvent by the National Bank of Ukraine, which resulted in the loss of $174m in cash. The bank was controlled by none other than Ferrexpo’s largest shareholder Kostyantin Zhevago.
Nearly two years on and a lot has changed for the company. The most significant change is the commodity price recovery. The price of iron ore has rallied from under $50/t at the end of 2015 to $75/t today, down from a multi-year high of $87/t. Over the same period, the company has managed to cut cash production costs per tonne by 13% to $27.7. As a result, for 2016 group EBITDA increased by 20% to $375m and profit for the year rose 491% to $189m. With capital spending reduced to conserve cash, the group was able to use cash from operations generated in 2016 to pay down debt and rebuild its cash balance. Net debt increased by 32% to $589m during 2016 and group net cash rose 314% to $145m.
Still cheap
Assuming Ferrexpo’s recovery continues, there could be further gains ahead for the shares even though they’ve already nine-bagged over the past year.
City analysts expect the company to continue to reap the rewards of high iron ore prices throughout 2017 and have pencilled-in earnings per share growth of 60% for the year to 43.2p. Based on this estimate, the shares are currently trading at a forward P/E ratio of 3.4, which is cheap no matter how you look at it.
Unfortunately, earnings are expected to slide during 2018, but even with a 43% decline in earnings per share predicted, the shares still trade at a 2018 P/E of 6.3.
So, based on Ferrexpo’s current valuation, it looks as if the shares could have further to run.
