Ferrexpo selloff overdone, says Liberum
Liberum has upped its stance on shares of Ferrexpo to 'buy' form 'hold' as it said the recent selloff was overdone.
Ferrexpo
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16:50 19/04/24
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The broker noted that Ferrexpo share have dropped 31% in the past two weeks on concerns about potential management involvement in the possible misappropriation of funds from Ukrainian charity Blooming Land, to which Ferrexpo has donated $110m over six years.
Liberum said it was unlikely management knew of or suspected any potential misallocation of funds before ceasing payments to the charity in May 2018.
"Assuming this becomes clearer following completion of the independent review, we expect the shares will rebound, despite our view of further softness in Chinese steel demand and a pullback in benchmark iron ore prices."
Liberum pointed to a number of reasons why it's unlikely that management was complicit. It said the only doubt that has been cast around Ferrexpo's chief executive, Zhevago's independence from Blooming Land is from auditor Deloitte, which has not alleged any link but rather has not been able to absolve the possibility that there is a link.
"This is obviously very different from any specific allegation," the broker said.
In addition, it pointed out that the sudden resignation of Deloitte last week, which prompted a huge slump in the share price, is in part due to a technicality. "The resignation was because the company had to publish its results for 2018 before the conclusion of the independent review into the case. The auditors placed some blame for this on the board of the company, which did not immediately vote in favour of an investigation into the matter," it said.
"Ferrexpo claims this was because of Ukrainian holiday season in January where there are a large number of public holidays meaning work could not start in earnest until February."
Liberum also argued that the incentive for the CEO to knowingly participate in misappropriation of funds isn't obvious given the relative risk reward.
"Zhevago owns 51% of the company (worth circa $800m) and his dividend last year was worth about half the amount paid to Blooming Land in the previous five years," it noted.
The broker lifted its price target on the stock to 250p from 185p to reflect the current strength in iron ore prices and spot free cash flow yield of 26%.
At 1215 BST, the shares were up 0.8% to 209p.