Ferro - 4Q22 financial results summary – Warsaw Stock Exchange

Recommended action

We uphold our recommendations for the Company: ST relative Underweight and LT fundamental Hold. In line with our expectations the Company’s 4Q22 EBIT fell yoy and we expect 1Q23 operating performance to be weaker yoy as well. We believe the unfavorable market conditions prevail and new housing investments continue to decline in the region which will undoubtedly affect the demand on the primary construction materials market. Moreover, the consumers’ deteriorating condition hurts the secondary market and clients seem to look for cheaper goods and are not interested in novelties, which could be observed a year before. The situation on the commodities market has improved slightly witnessing a drop of raw materials prices and PLN strengthening vs US$ last year. We expect to see a pressure on sales and profitability support.

Sector: Construction materials

Market Cap: US$ 126.4 m

Fundamental rating: Hold (→)

Bloomberg code: FRO PW

Market relative: Underweight (→)

Av. daily turnover: US$ 0.04 m Price: PLN 25.5

12M range: PLN 20.00-32.80

12M EFV: PLN 28.7 (→)

Free float: 100%

Guide to adjusted profits Income tax.

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Recent events

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

Upcoming events

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

4Q22 financial results summary

The Group’s 4Q22 revenues reached PLN 209million (down 6% yoy) and FY22 sales grew 10% yoy to PLN 915 million with the segments of batteries and accessories/ installation fittings/ heating systems contributing PLN 421/ 302/ 175 million (up 8%/ 19%/ 4% yoy). The Group’s FY22 sales in Poland/ Czechia/ Slovakia/ Romania/ Hungary/ other countries increased by 6%/ 13%/ 19%/ 16%/ 32%/ 1%.

The 4Q22 EBIT margin stood at 9.2% and exceeded our expectations, as we assumed a profitability decline to 8.0% vs 9.8% in 4Q21. Ultimately, the Group’s 4Q22 NI hit PLN 19 million (down 12% yoy, but still above our expectations). Nonetheless, net financial costs turned out to be materially higher than we forecast: PLN -6 million vs PLN -3 million on the back of higher cost of interest (debt increase and interest rates hikes; we assumed positive FX differences). In consequence, the Group’s 4Q22 PBT hit PLN 14 million (down 14% yoy), in line with our forecast. The Group’s NI reached c. PLN 12 million (up 11% yoy) and beat our forecast by 9% (the effective tax rate was 31% in 4Q21).

At the end of 4Q22 the Group’s inventories stood at PLN 293 million (up 13% yoy) and ND totaled PLN 182 million vs PLN 104 million at 2021-end; the ND/ EBITDA ratio reached 1.7x. Operating/ investing cash flows in 2022 reached PLN -4/ -26 million vs PLN 58/ -73 million in 2021.

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Financial forecasts

We keep our financial forecasts intact.

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 Jaskiewicz, CFA

GPW’s Analytical Coverage Support Programme 3.0

8/2023/GPW (25) March 30, 2023

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.