JP Morgan upgrades Ferrexpo on valuation, free cash flow forecasts

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.