Cantor doubles Ferrexpo target price to 79p

Cantor Fitzgerald has doubled its target price for Ferrexpo, after recent results from the iron ore pellet producer beat market consensus and the company became the lowest-cost pellet producer in the world.

Ferrexpo reported a new production record and that it had preserved its profit margin at 32% despite a 42% fall in the underlying iron ore price.

This meant that although production was up 5.8% at 11.7m tonnes (Mt) and sales were up 1.5% at 11.3Mt, revenue fell 28.2% to $961m and adjusted operating profits were down 33% to $310m and adjusted earnings per share 83% lower at 5.5 cents.

Following the insolvency of Bank Finance & Credit, in which FXPO held $175m of its reserves, cash was just US$35.3m.

But Cantor believes the new target price of 79p, lifted from 39p, "adequately reflects the current risk-reward profile associated with FXPO in relation to its ongoing debt repayments in light of its modest cash balance, and relatively low iron ore prices".

With 2016 having started well according to management, with a recent recovery in iron ore prices coming after operating costs have been further trimmed and $39m more debt was repaid by the end of February without an impact on cash reserves or pellet stock pile.

Cantor analyst Asa Bridle said he believed the first phase of refinancing should be undertaken in the second half of the year.

Forecasting $942m revenue and EPS of 19.9 cents, he maintained his 'buy' rating, with the target price lifted on the likelihood of FXPO "sustaining its impressive operating performance while the pellet market is starved of supply from Samarco following its tailings dam failure and enforced production suspension."

However, Bridle's positive outlook relies upon a successful restructuring of the company’s debt commitments.

"The company has been able to refinance in the past, and we have assumed a significant increase in interest charges, to reflect the associated risk."