Key points

• Ferrexpo’s share price has been down over 66% in the past year.
• In 2021, the company was the world’s third largest exporter of pellets, with a market share of about 9%.
• The ongoing war in Ukraine has caused constraints on the logistic capacity of the company.

The Ferrexpo Plc (LSE:FXPO) share price is trading down over 50% year to date following an extensive period of volatility. In contrast, the FTSE 100 is up about 0.75% over the same period, indicating that the business is going through some tough times.

Is the current downward trend a sign to stay away? Or is this just short-term panic creating a buying opportunity for my portfolio? Let’s take a closer look at what lies in store for the Ferrexpo share price and its dividend.

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What is the financial position of Ferrexpo?

Ferrexpo is a Swiss-based iron ore pellet company listed on the London Stock Exchange in the United Kingdom and a member of the FTSE 250 index. Looking at the latest interim results, there are plenty of reasons to be worried about the state of the business.

First and foremost, its assets are in Ukraine, which isn’t exactly the most politically stable region to operate in right now, given there’s a war going on. So, it’s not surprising that revenues over the last six months have shrunk by 31% to $936m.

Meanwhile, the gross profit took a major hit, sending after-tax earnings collapsing by 88% to $82m. The war is undoubtedly to blame here. But inflationary pressures, especially on energy prices, seem to have also harmed cash flow wiping out a large chunk of profit margins.

With that in mind, it’s not surprising to see the Ferrexpo share price suffer. However, it’s not all doom and gloom. The group still has a favourable net cash position of $177m, providing a nice liquidity buffer. Meanwhile, with management paying off a lot of its debts last year, interest payments have fallen by 65%. And since interest rates are currently rising to combat inflation, the timing is somewhat perfect.

Total pellet production dropped by 14% versus a year ago, thanks to logistical constraints preventing the group from easily reaching its European customers. But it remains one of the world’s largest suppliers of iron ore pellets. And providing the war can come to a swift and peaceful resolution, there’s no reason why production volumes won’t be restored in the long term.

What are the analysts’ and brokers’ recommendations for the Ferrexpo share price?

The Ferrexpo share price has been very volatile, with a market capitalisation of $818.2m and a P/E ratio is 3.65. Under normal circumstances, that looks like a bargain buying opportunity. But with such a giant question mark surrounding the uncertainty in Ukraine, this may be, in fact, a value trap.

A range of brokers has provided their opinion on whether investors should buy, hold or sell Ferrexpo stock based on their current target price. And despite the risk, it seems many believe that the stock price is simply too low even with everything that’s happening. Therefore the analyst and broker consensus is that Ferrexpo shares are a buy with a price target of 232p.

What is the Ferrexpo dividend yield?

Many shareholders buy shares of the companies with the expectation of being paid dividends for those shares. And Ferrexpo has historically maintained a principle of testing the future growth of its business as well as shareholders’ return.

According to the interim report on 3 August 2022, the ongoing conflict in Ukraine and constraints in logistics made the directors elect not to make announcements on interim dividends. In other words, dividends have been delayed. As annoying as that is, I feel it’s a sensible idea. After all, with a lot of unknown factors at play, retaining capital to prepare for the worst-case scenario is probably wise.

In June 2022, the company shareholder approved a final dividend for 2021 at 6.6 cents per ordinary share. At this level, Ferrexpo’s dividend yield stands at an extraordinary 26%, making it among the list of UK stocks with the highest dividends.

However, whether this will be maintained in the future is anyone’s best guess. And I think there is a high chance that the current delays may evolve into cancellations if the Ukraine situation continues to deteriorate.

A final thought on the Ferrexpo share price

The company is currently constrained to supply European steel producers while also faced with the increased risk in its exposure to a singular market in terms of its outlook. Yet despite the ongoing war in Ukraine, the company is putting great effort into maintaining high-grade production, I feel.

Investing in new logistic solutions will likely result in increased costs when compared to the previous logistic pathway. Hence, the company’s profitability may be reduced for quite some time. However, I believe this business has enormous comeback potential once the war comes to an end.

The firm has a nice amount of liquidity to weather the storm. But the problem is no one knows how long the storm will last. Personally, I feel the degree of uncertainty is too high for my portfolio. Therefore, while I remain cautiously optimistic about the Ferrexpo share price, I’m keeping this firm on my watchlist for now.

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.