Franco-Nevada Corp (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 Precious metal sales: The company reported an impressive FY21 performance, wherein it has sold 558.3 gold equivalent ounce (GEOs), which is higher than 511.6 GEOs in FY20. This was supported by strong demand from gold and silver segment.
• Higher cash from operations: The company reported a higher cash from operations of USD 955.4 million in FY21, as compared to USD 803.9 million in FY20, supported by an increase in net income. This is a key positive as it enhances the company’s overall liquidity.
• Surge in dividend payment: In FY21, the company reported a surge in the dividend payment of USD 179.6 million, which is higher than USD 154.9 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.

Risks associated with the Investment:

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

 FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• FNV announced its full year result, wherein the company posted its revenue of USD 1,300 million, higher than USD 1,020.2 million in FY20. The surge was driven by higher income from gold and silver, while its iron-ore segment posted an exuberant performance driven by strong demand dynamics.
• The group reported its gross profit of USD 822.1 million, considerably higher than USD 620.4 million in FY20, due to a higher revenue partially offset by an increase in cost of sales.
• Income before income taxes stood at USD 857.7 million, significantly higher than USD 339.3 million in FY20 due to an impairment reversal of USD 68 million v/s an impairment charge of USD 262.1 million in FY20. Other input costs stood in-line with previous year.
• The company reported its net income of USD 733.7 million, as compared to USD 326.2 million in FY20, 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 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 closing price of CAD 205.26 on April 06, 2022.

One-Year Technical Price Chart (as on April 06, 2022). Analysis by Kalkine Group

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