TD ReportEvent Champion's reported its Q4/F21 financials (quarter-ending March 31) .
Impact: NEUTRAL
Record EBITDA — EBITDA in the quarter was $276mm, above our estimate of $265mm and below consensus of $303mm. The beat relative to our estimate was largely due to higher-than-expected revenues of $397mm (TD: $387mm). This miss relative to consensus should not be viewed as overly material, in our view, as it was driven by volatility in iron ore prices in the quarter, which resulted in larger-than-expected negative provisional price adjustments. These should reverse themselves in calendar Q2.
Strong FCF — We calculate that Champion generated $96mm of FCF in Q4/21, before working capital adjustments but including Phase 2 expenditures of $46mm. The company ended the quarter with cash and restricted cash of $653mm, $27mm in investments, and US$220mm undrawn on its credit facilities. The company remains very well-capitalized to complete the Phase 2 expansion to 15Mtpa, which remains on budget and on track for completion in mid-2022.
High-grade (65%-Fe) iron ore prices continue to be extremely volatile through calendar Q2, with prices surging over US$70/t to a record US$268/ t in mid-May, before settling back to the current spot price of ~US$213/t. The volatility has been sparked by sharp movements in Chinese steel prices and their downstream impact on steel margins. The sell-off has also been fuelled by concerns over recent commentary by China's National Development and Reform Commission that it is planning to crack down on price speculation in commodity markets, including steel and iron ore prices.
Upside to our estimates at current pricing — Despite the very recent price weakness, high-grade iron ore prices have averaged US$225/t through calendar Q2, which is well above our estimate of US$195/t and suggests material upside to our estimates. Every US$10/t change in iron ore prices affects our FY2022 EBITDA estimates by ~$101mm.
TD Investment Conclusion We are maintaining our $8.00 target price and BUY rating. Champion delivered another exceptional quarter, in our view, and took full advantage of the current strength in pricing.
FY2022 is poised to be another strong cash-generating year, positioning the company to advance its growth initiatives with cash on hand.