Stock Market: Ferro (WSE: FRO) – 2Q22 Financial Results Preview
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This report is prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program. 3.0. This is an excerpt from the Polish version of DM BOÅš SA’s research report.
22/2022/GPW (74) July 24, 2022
Sector: Construction materials
Fundamental rating: Buy (→)
Market relative: Neutral (→)
Price: PLN 24.30
12M EFV: PLN 31.7 (→)
Market Cap: US$ 111 m
Bloomberg code: FRO PW
Av. daily turnover: US$ 0.04 m
12M range: PLN 25.00-41.10
Free float: 55%
Recommended action
We uphold both, our ST market relative Neutral rating and LT fundamental Buy recommendation for the Company. In our view, the Group’s 2Q22 financial results should be good on the operating level, albeit lower qoq and yoy due to the high base. We expect revenues and EBIT at PLN 230 million and PLN 26 million, respectively. 2Q22 NI might have been under pressure stemming from a higher yoy cost of credit and negative FX differences, whereas a year before there was the favorable impact of the principal amount and interests booked in 2Q21 on the back of the court ruling against the Tax Office (the Company got PLN 35 million).
2Q22 financial results preview
We forecast the Group’s 2Q22 revenues at PLN 230 million (up 5% yoy) and expect the EBIT profitability dip to 11% vs 14% in 2Q21. The profitability softening should be related to a yoy growth of raw materials costs without the possibility to pass the increase on product prices. We forecast PLN 6 million of net financial costs vs PLN 14 million of net financial gains a year ago (the favorable impact of the ruling in the court case against the Tax Office). We assume negative FX differences in the discussed period, similar as a quarter before, and in consequence, forecast the Group’s 2Q22 NI at PLN 13 million, vs PLN 58 million in 2Q21 (with the positive income tax impact of PLN 14 million then).
Financial forecasts
We keep our expectations of the Company’s financial results intact, albeit we see their realization more at risk, in particular when the next year is concerned. In 1Q23 the Company will launch a logistic center in Romania which should be fully operational in 2Q23. This should lower the transportation costs to south European markets and help improve the quality of services boosting sales. Additionally, lower raw materials prices (9-month delay between the order and purchase) and lower freight costs should affect the Company’s results favorably. The Group should also expand their sale options in the heat source segment, though we are concerned that the overall economic climate and housing market conditions, especially in Poland, may adversely affect the demand in this segment.
In 2021, 47%/ 30%/ 20% of the Company’s consolidated sales stemmed from batteries and accessories/ installation fittings/ heating systems (Termet & Tester); 46%/ 18%/ 16%/ 6%/ 4%/ 10% of revenues were generated in Poland/ Romania/ Czechia/ Slovakia/ Hungary/ other countries. Exports of the heating systems segment (<10%) was much lower than in other segments. The acquisition of Termet &Tester more than doubled the Group’s domestic sales. The Group’s organic growth in 2021 reached 27%, including a 21%/ 34% increase in sanitary fittings (sales at PLN 391 million)/ installation fittings (sales at PLN 253 million). The acquired companies consolidated from the beginning of March last year boosted the Group’s revenues by PLN 169 million. Currently, the demand in the sanitary fittings segment seems to be limited in Poland. The utilization of heating segment capacities is high.
Demand for the Company’s goods and products is driven by the development of the residential market in the region. In the installation fittings segment, the replacement demand constitutes 55% with 45% coming from new investments. In the section of batteries and accessories, 80% of demand results from renovations and 20% from new residential investments. The Company distributes its goods and products through traditional (66%) and modern (34%) channels. The Company benefits from a one-to-two year shift in demand with respect to the construction of apartments. So far the renovation cycles shortening was observed, though this may change.
The situation on housing markets in Poland and neighboring countries have been deteriorating. According to the CSO,
- in 2020 in Poland (i) 224,000 dwellings were started, down 6% yoy, (ii) 222,000 dwellings were delivered, up 7% yoy, and (iii) 276,000 building permits were issued, up 3% yoy;
- in 2021 (i) 227,000 dwellings were started, up 24% yoy, (ii) 235,000 dwellings were delivered, up 6% yoy, and (iii) 341,000 building permits were issued, up 23% yoy.,
- In 1H22 (i) 120,000 dwellings were started, down17% yoy, (ii) 109,000 dwellings were delivered, up 4% yoy, and (iii) 171,000 building permits were issued, down 1% yoy.
According to the Czech Statistical Office,
- in 2021 (i) 45,000 dwellings were started, up 28% yoy, (ii) 35,000 dwellings were delivered, up 28% yoy, and (iii) 91,000 building permits were issued, up 6% yoy,
- In 1Q22 (i) 11,000 dwellings were started, up 28% yoy and (ii) 9,000 dwellings were delivered, up 1% yoy.
According to CEIC DATA, in Romania
- in 2021, 113,000 building permits were issued, up c. 12% yoy and
- in 1H22, 49,000 building permits were issued, down c. 4% yoy.
Strategy
The Company planned to update its strategy in 2H22 and we expect this will be delivered, albeit the task may be more difficult given the current circumstances. The Company’s current strategy includes (i) consolidated revenues and EBITDA targets at PLN 700 million and PLN 90 million, respectively in 2023, (ii) investment expenditures in this period below PLN 10 million till 2023, and (iii) the Group’s ND/EBITDA multiple below 2.5x in 2018-23. These assumptions do not cover acquisition plans. We expect an upgrade of previous targets and announcement of new acquisitions.
