Analytical Report – Ferro -3Q22 Financial Results Review - WSE:FRO

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.

Sector: Construction materials

Fundamental rating: Hold (→)

Market relative: Neutral (↑)

Price: PLN 24.00

12M EFV: PLN 28.7 (→)

Market Cap: US$ 112 m

Bloomberg code: FRO

PW Av. daily turnover: US$ 0.03 m

12M range: PLN 22.50-37.80

Free float: 55%

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Recommended action

We raise our ST market-relative bias to Neutral from Underweight while keeping LT Hold fundamental recommendation intact. The Group’s 3Q22 financial results exceeded our expectations on the operating level, albeit financial costs rose more than we assumed and NI was only marginally higher than our forecast. 3Q22 revenues/ EBITDA/ NI changed by 0%/ -6%/ -37% yoy.

The market environment does not seem friendly, in our view, as new housing investments in the region start to stumble which will undoubtedly affect the demand for construction materials in the quarters to follow. Moreover, deteriorating consumers’ condition may hurt the secondary market. It looks like a spark of hope for the Company may constitute the perspective of the recovery and reconstruction in Ukraine, but first the war has to end.

A tad better situation is on the commodities market with raw materials prices falling in 2Q and 3Q22 and slightly rising in 4Q22 which is offset by PLN appreciation vs US$.

The Group plans to launch a new logistic center in Romania in 1H23 which implies temporary higher OPEX and higher inventories, albeit we deem the new warehouse opening is beneficial from the strategic perspective because not only will this enable a revenues growth and faster penetration of South European markets, but also will curb costs streamlining logistic processes (no transportation from Poland).

3Q22 financial results review

The Group’s 3Q22 revenues reached PLN 226 million (flat yoy) while we assumed a 2% yoy decline. The Company’s segments of batteries and accessories/ installation fittings/ heating systems generated PLN 105 million (up 2% yoy)/ 78 million (up 18% yoy)/ 40 million (down 23% yoy). We assumed slightly lower revenues in the segments of batteries and accessories (down 3% yoy) and installation f ittings (up 15% yoy) while in the heating systems we expected higher sales (down 10% yoy).

The Group’s sales in Poland/ Czechia/ Slovakia/ Romania/ Hungary/ other countries changed by -11%/ +12%/ +11%/ +14%/ +18%/ -2% yoy in 3Q22. The sales in Poland show a declining trend this year (PLN 120/99/ 98 million in 1Q/2Q/3Q22), so do sales in Czechia (PLN 43/38/36 million in 1Q/2Q/3Q22) and Hungary (PLN 12/10/10 million in 1Q/2Q/3Q22). The Group’s 3Q22 sales were supported by the Romanian (PLN 43/43/46 million in 1Q/2Q/3Q22), Slovakian (PLN 15/14/14 million in 1Q/2Q/3Q22), and other markets (PLN 22/20/23 million in 1Q/2Q/3Q22).

The EBIT margin at 12.2% (vs 13.3% in 3Q21) exceeded our expectations, as we forecast a profitability decline to 9.6% in 3Q22. The profitability softening should be related to a yoy growth of raw materials costs without the possibility to pass the increase on product prices coupled with rising costs of salaries in relation to revenues. In consequence, the Group’s 3Q22 EBIT fell 8% yoy and reached PLN 28 million beating our expectations.

Nonetheless, 3Q22 net financial costs turned out to be materially higher than we assumed: PLN 10 million vs PLN 6 million, on the back of high FX differences and higher interest (debt increase and interest rates hikes) as well.

Ultimately, the Group’s 3Q22 NI hit PLN 14 million (down 37% yoy) slightly exceeding our expectations (by 12%).

At the end of 3Q22 the Group’s inventories stood at PLN 363 million (up 11% qoq) and the net debt totaled PLN 190 million vs PLN 104 million at the 2021end; the ND/ EBITDA ratio reached 1.5x. Operating cash flows in 3Q22 reached PLN -22 million and PLN -58 million in 1-3Q22.

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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