Excerpts from Phillip Securities report
Analyst: Vivian Ye
Maintain BUY with higher TP of S$0.64 from S$0.47 as we roll over our 11x P/E target to FY22e, still in line with industry average. Our FY22e PATMI has been raised by 27% to US$21.8mn as we increase our production forecast by 12% to 498,032 DMT. Iron ore prices are expected to remain elevated with a rebound in steel production and supply disruptions. |
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Source: Interview
The Positives
+ Steady increase in volume. Iron ore concentrates sold increased 66.7% YoY by volume in 4QFY21 and 67.9% in FY21.
This lifted revenue by 111.6% in 4QFY21 and 84.1% in FY21.
QoQ, volume sold and revenue were higher by 60.2% and 68.3% respectively.
+ Spike in margins. Gross profits more than doubled from US$5.5mn in 4QFY20 to US$13.6mn in 4QFY21.
Gross profit margins rose from 67.1% to 78.6%. This was achieved with higher realised ASPs of iron ore concentrates, which went from US$92.83/DMT in 4QFY20 to US$120.70/DMT in 4QFY21.
Unit costs also decreased from US$25.32/WMT to US$20.70/WMT with the help of efficiency gains.
+ Operating cash flow turned positive. Operating cash flow turned from a negative US$11k in 4QFY20 to a positive US$2.7mn in 4QFY21.
4QFY21 FCF remained a negative US$4.2mn vs. -US$478k in 4QFY20 from a spike in capex.
Full year, FCF increased to US$7.1mn from US$4.8mn in FY20.
The Negative
- Spike in capex. Capex jumped from US$390k in 4QFY20 to US$3.6mn in 4QFY21, as FML expanded its truck fleet and reinvested in its Bukit Besi mine for further exploration works.
Outlook
Outlook remains positive for FML.
Demand for iron ore. According to the World Steel Association, global crude steel production increased by 10.0% to 486.9mn tonnes in the first three months of this year. This spurred continued growth in demand for iron ores. World Steel forecasts that steel demand will grow by 5.8% in 2021 to 1.874bn tonnes, after dipping by 0.2% in 2020.
China’s attempts to cut steel output in 2021 have apparently tripped. According to the China Iron and Steel Association, steel production in March 2021 increased 19.1% YoY to 94.0mn tonnes.
Production was 91.3mn tonnes in December 2020. In April 2021, seven steel companies in Hebei province had to be asked to cut production by 30-50% from March to December 2021.
Elsewhere, iron ore supply from Brazil, the world’s largest supplier, has been made uncertain by inclement weather. This bumped up iron ore prices to a 10-year high.
We expect prices to remain above US$110/DMT. Current prices are about US$170/DMT. Malaysia’s production of iron and steel bars and rods drifted down in 4Q20 but production has since risen.
It increased by 4.3% MoM in January and 16.0% in February.
This could be attributed to the Malaysian government’s increased resources for the construction sector, as the economy tries to stage a recovery from the pandemic.
Acquisition of MMSB Group. FML completed its acquisition of the entire issued and paid-up share capital of the Monument Mengapur Group (MMSB) on 7 April 2021. Commercial production is expected to start in FY23e. We have not factored in contributions from the Mengapur site.
We expect FML’s production to increase 10% in FY22e and iron ore prices (Platts Iron Ore Index, IODEX 65% Fe CFR North China) to remain elevated. Our FY22e iron ore ASP forecast is US$102/DMT, increased from US$98/DMT. We continue to peg the stock at 11x FY22e P/E, the industry average. Maintain BUY with catalysts expected from increase in production and strong iron ore prices. |
Full report here.
