Warsaw Stock Exchange: Ferro - 1Q23 financial results preview

Sector: Construction materials

Market Cap: US$ 140 m

Fundamental rating: Hold (→)

Bloomberg code: FRO PW

Market relative: Underweight (→)

Av. daily turnover: US$ 0.05 m Price: PLN 27.40

12M range: PLN 20.00-31.00

12M EFV: PLN 28.7 (→)

Free float: 100%

Recommended action

We uphold our recommendations for the Company: ST relative Underweight and LT fundamental Hold. We expect 1Q23 operating results to slide yoy which we signaled in our previous research report.

We believe the market conditions have remained unfavorable and clients look for cheaper products from the low market segment which coupled with a smaller number of housing investments and uncertainty related to heat sources may lead, in our view, to the Group’s 1Q23 revenues yoy decline. From the perspective of raw materials (theirs prices fell in 2022), freight (material drop of costs), and FX rates (PLN strengthening vs US$) the situation should support the profitability, however we assume that the Company has been selling - at least some - goods purchased in a less favorable environment. We expect some pressure on sales in a few upcoming quarters, albeit we hope for the cost side to support margins.

The launch of a new logistic center in Romania in 2Q23 implies higher, albeit temporary, both OPEX and inventories in 2Q, and we believe that some material savings will surface on the transportation front, the accessibility of goods will improve and finally the sales expansion will intensify in the segment of heat sources.

Guide to adjusted profits

No factors necessitating adjustments.

✕

Stock performance

✕

Recent events

1. Release of 1H22 consolidated results: September 20, 2022
2. Release of consolidated 3Q22 results: November 18, 2022
3. Release of FY22 consolidated financial results: March 30, 2023

Upcoming events

1. Release of 1Q23 consolidated financial results: May 29
2. Release of 1H23 consolidated results: September 27
3. Release of consolidated 3Q23 results: November 28
4. Logistic center launch in Romania: 1H23

1Q23 financial results preview

In 4Q22 the Group’s sales in Poland/ Czechia/ Slovakia/ Romania/ Hungary/ other countries changed by -14%/ +6%/ +11%/ +8%/ +19%/ -24%. The sales in Poland showed a decline last year (PLN 120/ 99/ 98/ 89 million in 1Q/ 2Q/ 3Q/ 4Q22) with the similar trend observed on the majority of important markets, albeit Poland’s market was clearly the weakest. In 1Q/ 2Q/ 3Q/ 4Q22 revenues in Czechia reached PLN 43/ 38/ 36/ 36 million, in Hungary PLN 12/ 10/ 10/ 10 million, in Romania PLN 43/ 43/ 46/ 39 million, in Slovakia PLN 15/ 14/ 14/ 14 million, and PLN 22/ 20/ 23/ 21 million on the remaining markets. 4Q22 sales in the segments of batteries and accessories/ installation fittings grew 0.1%/ 2% yoy while the heating systems witnessed a 26% sales decline.

✕

We expect the trends (like the domestic market as the weakest link) observed in the 2022-end to prevail in 1Q23. We forecast a sales drop of 18%/ 5%/ 26% yoy in the segments of batteries and accessories/ installation fittings/ heating systems and ultimately we expect a 17% fall of the Group’s 1Q23 revenues with the EBIT margin sliding to 10.8% vs 12.6% a year ago. The currency environment and commodities market seem more favorable now, but Ferro is selling inventory purchased earlier. Moreover, there is some pressure on prices visible from clients. All these mentioned above elements should lower the margin.

Given the FX rates level we forecast positive FX differences at PLN 1 million vs PLN 1 million loss in 1Q22 and expect lower financial costs than in the base quarter. Thus we forecast PLN 15 million of 1Q23 NI (down 29% yoy).

Financial forecasts

We update our FY financial forecasts incorporating 1Q23 expectations. Capex is slightly lowered. It looks like the Company is more cautious with expenses considering the still feeble economic situation visible already last year. We expect this year’s capex to reach PLN 25 million and then to increase in the following years.

Valuation

A risk free rate revision, peer valuation update, and valuation horizon forward shift in time offset small changes introduced in our financial forecasts. Our 12M EFV constituting a 50%-50% mix of DCF FCFF method and peer-relative valuation, stays at PLN 28.7 per share. The DCF FCF/peer-relative valuation yields PLN 31/ 26 per share (previously PLN 32/ 25 per share).

Strategy

In 2022 Poland/ Czechia/ Slovakia/ Romania/ Hungary/ other countries contributed 44%/ 19%/ 17%/ 6%/ 5%/ 9% of the Group’s revenues vs 46%/ 18%/ 16%/ 6%/ 4%/ 10% in 2021. Last year the best performing market was Hungarian (sales grew 32% yoy) with Slovakia (up 19% yoy)/ Romania (up 16% yoy)/ Czechia (up 13% yoy)/ other countries (up 1% yoy) following. In Poland sales grew 6% yoy.

In 2022 the segments of batteries and accessories/ installation fittings/ heating systems (Termet & Tester) had a 46%/ 33%/ 19% share in the Company’s consolidated sales vs 47%/ 31%/ 20% in 2021; FY22 sales in the segments of batteries and accessories/ installation fittings/ heating systems grew 8%/ 19%/ 4% yoy.

Ferro plans an intense development in Southern Europe, also in the heating segment which should be possible thanks to the launch of a new distribution center in Romania housing training and exhibition facilities as well (its opening expected within a few weeks).

According to the Company’s management’s estimations the implementation of the F1R2 strategy (without acquisitions) will allow Ferro’s FY26 revenues and EBITDA to reach PLN 1,400 million and PLN 193 million, respectively, with annual capex not exceeding PLN 30 million.

The Strategy F1R2 assumes a dividend payout in the amount not less than 50% of the Company’s NI in the stable market and financial situation including, among other things, the consolidated ND/ EBITDA ratio staying ⩽ 2.5x.

In our opinion, targets included in the new strategy are realistic and our FY26 revenues and EBITDA forecasts at PLN 1,322 million and PLN 174 million, respectively, are only slightly lower.

Risk factors

1. Economic slowdown in Europe
2. Falling demand for new flats
3. Falling frequency of renovations
4. Qualified workforce shortage
5. Pressure on salaries
6. Energy/ heat price increase
7. Volatile raw materials prices (of copper and zinc, in particular)
8. Unfavorable/ volatile FX rates (currency risk when PLN and CZK weaken against US$ and EUR)
9. Lack of stability in the region
10. Temporary higher inventories
11. High interest rates

Catalysts

1. Expansion in European markets
2. Strengthening position on the existing markets
3. Launching a new logistic center in the southern Europe
4. New products (expanding the product offer)
5. Own brands repositioning
6. Favorable FX rates and raw materials prices
7. Acquisitions in attractive segments
8. Implementation of the adopted strategy F1R2

Analyst: Sylwia Jaśkiewicz, CFA

GPW’s Analytical Coverage Support Programme 3.0