Over the past year-and-a-half, fortunes have been made on Ferrexpo (LSE: FXPO), the London-listed iron ore pellet producer. Declining commodity prices and investor sentiment left the shares changing hands around 17p in January 2016 and today’s share price of 238p represents a capital return of 1,300% for investors who bought the shares back then.
Strong demand
However, the operational and share price momentum seems so strong that I reckon there could be more to come for investors. Today’s half-year results underpin the argument, with the directors saying they expect demand to remain strong through the second half of 2017 with production marginally ahead of the first half.
The figures are robust with revenue ballooning 29% compared to the equivalent period a year ago, net cash from operations shooting up 37% and net debt down by 36% to US $481m, which is around twice the level of the firm’s pre-tax profit for 2016 and the lowest since 2012.
Cyclicality and growth
As you might expect, the price of iron ore has been trending upwards since this dramatic reversal in Ferrexpo’s fortunes, but it is pleasing to see the firm paying down its debt while the economic sun is shining. Yet I think it would be unfair to suggest that the company is merely a cyclical leaf being blown around by winds of sentiment and macroeconomics. There’s a big element of that, of course, but it also claims to be managing costs and increasing levels of capital investment to grow output. As well as cyclicality, there’s growth here.
I’m less enamoured with public services provider Serco Group (LSE: SRP), which also released its half-year results this morning. The shares are up almost 3% as I write and chief executive Rupert Soames reckons first-half trading shows an improvement in underlying trading profit compared to the second half of 2016, keeping the company on course to meet the directors’ expectations for the full year.
Wiggly earnings
City analysts following the firm predict a 61% decline in earnings for 2017 compared to 2016 and a partial recovery as earnings rebound by 35% during 2018. However, the firm’s record of trading shows earnings as likely to fall as they are to rise over the past five years and I’m not willing to bet that the firm can ever fully recover from its operational problems and catastrophic profit collapse around 2014.
That said, the top executive is clear that the firm’s order intake has been strong for “two successive periods” totalling around £4bn in the last 12 months. However, he goes on to admit that the directors remain cautious because the political environment in several of the company’s markets is more and more unpredictable.
In many ways, I see the firm’s fortunes as largely outside its own control because a change in government policy could potentially pull the rug from forward earnings at any time, therefore I’m avoiding the shares even as a potential recovery play.