JP Morgan upgrades Ferrexpo on valuation, free cash flow forecasts

Analysts at JP Morgan slashed their target price on shares of Ferrexpo, on account of what they said was the iron ore miner's now higher cost base.

Indeed, at the half-year stage, Ferrexpo had posted a 31% jump in its unit costs which, in combination with the 21% fall in iron ore prices from peak to trough, had sent its shares tumbling 47% since March 2018, the investment bank said.

However, at spot iron ore and foreign exchange prices, the shares were now trading on a price-to-earnings multiple of 4.3 for 2018, falling to 3.9 for the following year.

On an EV/EBITDA basis meanwhile, the stock was on 3.3, falling to 2.9 in 2019 and JP Morgan estimated that iron ore and pellet premia would need to fall by a further 20% to $55 and $46 per tonne, respectively, in order for them to trade back at their 10-year average multiple of 5.1.

Furthermore, JP Morgan was calculating that the company's free cash flow yield would improve from roughly 15% in 2018 and 2019 to over 5% in 2020, as ore inventories were destocked.

Hence, and despite his target price reduction, analyst Dominic O'Kane upped his recommendation on the shares from 'neutral' to 'overweight', in light of the "attractive" risk-adjusted returns potential that he spied in them.