Franco-Nevada Corporation (TSX: FNV) is a precious-metals-focused royalty and investment company. The company owns a diversified portfolio of precious metals and royalty streams, which is actively managed to generate the bulk of its revenue from gold, silver, and platinum.

Key Updates:

• Increase in Sales Volume and Profitability: In Q1FY22, the company reported a higher revenue of USD 338.8 million, as compared to USD 308.9 million. The surge was driven by higher realization prices (USD 1,874/oz v/s USD 1,794/oz in pcp) coupled with an increase in sales volume (178,614 GEOs v/s 175,737 GEOs in pcp). Moreover, the company reported its Adjusted EBITDA of USD 286.6 million, up 9% on y-o-y basis.

Source: Company Report 

• Industry beating margins: For Q1FY22, the company reported its gross margin and EBITDA margin of 65.1% and 84.2%, respectively, significantly higher than the industry median of 48.8% and 39.2%, respectively. Net margin was recorded at 53.7% in Q1FY22, as compared to the industry median of 13.3%. These indicates that the company has better cost management when compared to the industry median.

• Surge in Dividend payment: The company reported a higher dividend payment of USD 50.1 million in Q1FY22, as compared to USD 41.8 million in pcp. A higher dividend distribution amidst the ongoing sluggish economic growth is impressive as most of the businesses are lowering their dividend distribution in order to retain liquidity.

• Improved liquidity: At the end of Q1FY22, the company reported cash and cash equivalent of USD 722.7 million, which is significantly higher than USD 539.3 million in Q4FY21. This is expected to enhance the company’s liquidity position, which is a key positive.

Risks associated with the Investment:

Volatility in the international commodity prices, likely to dampen the realization of the company. Moreover, rising input costs on account of inflation might lead to suppressed margins.

  Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report) 

• In Q1FY22, the company posted its revenue of USD 338.8 million, higher than USD 308.9million in pcp. The growth was driven by higher sales volumes coupled with an increase in realization price.
• The group reported its gross profit of USD 220.6 million, considerably higher than USD 197.1 million in pcp, due to a higher revenue partially offset by a slightly higher cost of sales.
• Income before income taxes stood at USD 218.2 million, grew from USD 191.4 million in pcp, due to a foreign exchange gain of USD 6.2 million, as compared to loss of USD 0.1 million in pcp coupled with higher gross profit as mentioned above. Other input costs stood slightly higher than the previous corresponding period.
• The company reported its net income of USD 182.0 million in Q1FY22, as compared to USD 171.5 million in pcp, supported by higher income before taxes, partially offset by slightly higher finance expense.

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group 

Stock Recommendation:

For FY22, the company expects its production in between 680,000 and 740,000 GEOs, within which precious metal is expected to contribute 510,000 and 550,000 GEOs. The corporation estimates its depletion expense in between USD 270 and USD 300 million in FY22. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Wheaton Precious Metals Corp, Osisko Gold Royalties Ltd. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 199.18 on May 04, 2022.

One-Year Technical Price Chart (as on May 04, 2022). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV

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