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What happened? Salzgitter this morning reported full 4Q24 results in-line with the company''s pre-release in February, which beat expectations (largely due to the treatment of one-offs in our view). FCF generation came above expectations. Meanwhile, the February FY25 guidance was reiterated. BNPP Exane View: With the guidance unchanged and Q4 results pre-released, the only new development was the divisional breakdown and the FCF performance. Positively, we note that FCF was particularly strong supported by a large working capital release. However, management commentary remains particularly cautious on the near-term outlook, despite higher infrastructure and defence spending expected in Germany (90% of sales). Those topics are likely to be discussed at length during the conference call. But more is needed, in our view, to justify recent share price outperformance. . PandL: Salzgitter had already pre-released Q4 EBITDA of EUR125m (versus consensus of EUR-4m at the time) and EBT of -EUR155m (below consensus of -EUR122m). The EUR406m one-offs reported for the year are unchanged from the pre-release. . By division: We now learn that EBITDA for the steel divisions came roughly in-line. As previously flagged, a portion of the Trading Unit restructuring measures (EUR120m) has been booked below the EBITDA line, explaining the headline Q4 EBITDA beat. Aurubis contribution was also particularly robust. . Cash Flow and Balance Sheet: Net debt ended the quarter at EUR753m, below BNPPe of EUR1,093m. While capex came above expectations, a larger working capital release drove the beat. Management expects net debt to be visibly higher in FY25 with capex guided towards EUR927m (BNPPe EUR860m versus consensus of EUR872m). . Shareholder returns: The company will propose a EUR0.20/sh dividend at the AGM. This is lower than BNPPe of EUR0.50/sh and BBG cons of EUR0.35/sh. . Papenburg bid: ''At the time when the annual financial statements were being drawn up,...
Salzgitter AG
What happened? Salzgitter yesterday pre-released Q4 results with EBITDA coming in surprisingly well above expectations on a strong Aurubis contribution. The FY25 guidance should bring downside risk to consensus. BNPP Exane View: It took us some time to decipher the pre-release. The Q4 EBITDA beat is surprising and cannot solely be explained by the strong (and also surprising) Aurubis contribution. It would make more sense if some of the Q4 restructuring expenses of EUR 128m had ultimately been booked below the EBITDA line. It could also simply imply better operational performance or year-end positive accounting effects. This could very well be the case as a new impairment in Q4 ought to have dragged Q4 results lower. The steelmaker did not provide any update on the non-binding offer, which was reportedly submitted by GP Gunter Papenburg (its second largest shareholder) and TSR in late January. This will be a key focus for the upcoming earnings call (March 21st) as shares have rallied hard on the news. We are a bit surprised by the market reaction given the 25% gap between the mid-point of the FY25 EBITDA guidance and consensus. We had previously flagged downside risk (see here). We also remain prudent on the MandA upside. Reiterate Underperform. . 4Q24: SZG expects 4Q24 EBITDA to reach EUR 124m, well above consensus of -EUR 4m and BNPPe of -EUR 41m, triggering the pre-release. No segmental breakdown was provided but we note that Aurubis contribution (EBT) of EUR 76m surpassed BNPPe of EUR 18m. Q4 group EBT of -EUR 155m is roughly in-line with BNPPe but below consensus of -EUR 122m. A new EUR 129m impairment was booked in Q4. . Restructuring: As expected, SZG recorded a one-off restructuring expense of EUR 128m in Q4, only slightly higher than the EUR 120m previously communicated. . FY25: SZG provided FY25 EBITDA guidance of EUR 350-550m (closer to BNPPe of EUR 495m than cons. of EUR 566m). The FY25 EBT guidance stands at EUR -100-100m...
What happened? Following press reports today, Salzgitter issued a press release confirming that its second largest shareholder GP Gunter Papenburg (~25%), a German building materials conglomerate, alongside a recycling company (TSR), submitted on January 22 a non-binding offer of EUR 18.5/sh ''in the context of a potential takeover bid to acquire the Company''s shares''. In early November, the steelmaker initially said the consortium was considering ''to submit a voluntary public takeover bid'' to acquire at least 45 % of the steelmaker''s shares. Who''s involved? . GP Gunter Papenburg: Based in Hanover, the private company has reportedly ~4,000 employees and operates in the construction, building material, and raw material sectors. The company started to build its stake in Salzgitter in 2020 (5%) followed by two blocks acquired in 2021 (10% then 15%) and rising to the current 25% ownership in May 2022. The company has also two board seats. . TSR Recycling: TSR is one of the leading ferrous and non-ferrous metals recyclers (8.5mtpa) in Europe with 4,000 employees. It recently partnered with Thyssenkrupp on a new processing plant in Duisburg. No stake has been reported. Any deal would also involve other key stakeholders: the unions (97% of workers under a collective agreement, Works Council has board representation) and the State of Lower Saxony which has a 26.5% stake (and has recently provided a EUR 300m grant to the company''s decarbonization project). Bloomberg reported today that the State of Lower Saxony was still doubtful of the economic merits of the bid, also requiring more clarity around the decarbonization strategy. We also note that the incoming elections also add more uncertainty regarding domestic green steel production. What''s next? ''The Company is in the process of examining the non-binding offer, including the price indicated. The outcome of the assessment and discussion with the consortium is open''. Salzgitter will report 4Q24...
What happened? Salzgitter this morning reported full 3Q24 results in-line with the company''s pre-release a month ago, which only modestly missed expectations (adjusted for one-offs). The guidance, which was also cut in October, was reiterated. We also note that Q3 FCF also came below expectations. No new communication on the Papenburg potential bid. BNPP Exane View: With the guidance unchanged and Q3 results pre-released, the only new development was the divisional breakdown and the FCF performance. Positively, steel margins, whilst markedly below peers, came above expectations. But the plate business remains under considerable pressure while cash performance also disappointed. We wait for the call to obtain more details around the potential MandA process which drove shares 30% higher last week. Salzgitter uniquely suffers from a more volatile product mix (plate/tube) and over-exposure to a weaker German market (~50% of group sales). Reiterate Underperform. . PandL: Salzgitter had already pre-released Q3 EBITDA of EUR 87m (versus consensus at the time of EUR 92m) and EBT of -EUR 153m including a EUR 149m impairment (mainly in Precision Tubes in the Steel Processing division). By division, we now learn that the slight miss came from the Steel Processing and Trading division. Steel production volumes and margins came above expectations. Aurubis contribution of EUR 37m was particularly robust. . Cash Flow and Balance Sheet: Net debt ended the quarter at EUR 1,050m, above consensus of EUR 919m (BNPPe of EUR 935m). Capex came below expectations, but a working capital build drove the miss. The sale of Mannesmann Stainless Tubes was previously reported to generate EUR 125m in cash in Q4. . Restructuring: SZG has initiated a new restructuring program (targeting the trading business) which would results in an additional one-off expense of EUR 120m, included in the FY24 guidance. . US elections: SZG notes that the reintroduction of Section 232 duties...
What happened? Salzgitter issued a press release noting that its second largest shareholder GP Gunter Papenburg (~25%), a German building materials conglomerate, alongside a recycling company, is considering ''to submit a voluntary public takeover bid'' in order to acquire at least 45 % of the steelmaker''s shares. Shares jumped more than 30% after market. Who''s involved? Salzgitter notes that the consortium which is likely to submit a bid is made of: . GP Gunter Papenburg: Based in Hanover, the private company has reportedly ~4,000 employees and operates in the construction, building material, and raw material sectors. The company started to build its stake in Salzgitter in 2020 (5%) followed by two blocks acquired in 2021 (10% then 15%) and rising to the current 25% ownership in May 2022. The company has also two board seats. . TSR Recycling: TSR is one of the leading ferrous and non-ferrous metals recyclers (8.5mtpa) in Europe with 4,000 employees. It recently partnered with Thyssenkrupp on a new processing plant in Duisburg. No stake has been reported. Any deal would also involve other key stakeholders: the unions (97% of workers under a collective agreement, Works Council has board representation) and the State of Lower Saxony which has a 26.5% stake (and has recently provided a EUR 300m grant to the company''s decarbonization project). What''s next? Salzgitter press release indicates that there is a strong probability the company will soon receive an offer. Once/if an offer is received, the company will have then to communicate an opinion on the nature and quality of the bid. We don''t believe this is part of a broader strategic review process. Salzgitter will report 3Q24 results next week, on Monday 11 Nov. BNPP Exane View: Salzgitter had been the worst performer of our global coverage, down 50% YTD, suffering from a more volatile product mix (plate/tube) and over-exposure to a weaker German market (~50% of group sales). This perhaps makes...
What happened? Salzgitter today pre-released Q3 operational results well below expectations and slashed its FY24 guidance. The miss and the cut are almost entirely driven by two one-offs totaling EUR 250m, explaining the market''s relatively muted reaction. BNPP Exane View: Timing is not a surprise given the company just published compiled consensus figures. Salzgitter follows Voestalpine''s warning last week, another German, auto-exposed steelmaker, with this large impairment, profit warning and new restructuring plan. However, adjusting for the two one-offs, operating performance comes roughly in-line with Q3/Q4 expectations. This is only of small comfort with spot German rebar and HRC margins in negative territory, and OEMs pushing for lower annual contracts (-EUR 200/t YoY). In our latest sector update (see below), we flagged significant downside risk into year-end and reiterated our Underperform rating. Latest sector note: The longest downturn . 3Q24: SZG expects 3Q24 EBITDA to reach EUR 88m, slightly below consensus of EUR 92m and above BNPPe of EUR 66m. No segmental breakdown was provided. EBT of -EUR 152m includes a EUR 130m impairment (Precision Tubes in the Steel Processing division). Adjusted EBT came in-line with consensus of -EUR 19m. We note that Aurubis Q3 contribution of EUR 38m came above expectations (EUR 25m). . 4Q24: SZG cut its FY24 EBITDA guidance from EUR 400-500m previously to EUR 275-325m (versus cons. of EUR 446m). This implies Q4 ranging from negative EUR 47m to positive EUR 3m (versus cons. of EUR 120m). The FY24 EBT guidance is also slashed from breakeven to -EUR 275-325m, implying Q4 of -EUR 135-185m (versus consensus of -EUR 43m). Adjusting for the EUR 120m one-off in Q4, the adjusted EBT guidance comes in-line with consensus (below for adjusted EBITDA). . Restructuring: SZG has initiated a new restructuring program (targeting the trading business) which would results in an additional one-off expense of EUR...
Salzgitter remains in a tough spot (-45% YTD) as the steelmaker continues to suffer from a more volatile product mix (plate/tube) and over-exposure to a lagging German economy (~50% of group sales). Decarbonization capex is rising and should put increasing pressure on the balance sheet. Positively, more restructuring is in the cards and the flexibility on SALCOS should be welcomed. We even expect price hikes in the near-term in Europe. But that''s not enough to change our view as we revise our EBITDA/FCF estimates lower and cut our TP. Reiterate Underperform. Plate/pipe business continues to underperform, non-steel businesses offer some support While Aurubis and Technology should offer continued support into H2, plate/pipe profitability should remain under severe pressure while flat-rolled volumes/margins should also further moderate. Net-net, we cut our FY24 EBITDA forecasts by -19% to EUR 445m, at the midrange of management''s new guidance. Positively, the Steel Processing business should start benefiting from new orders towards year-end, reinforcing our expectations of a marked improvement into FY25. FCF outlook remains problematic even as management cuts spending With additional restructuring in the cards, management is also keen to preserve cash and has postponed some investments. With EUR 850m in net spending expected this year, net debt should almost treble and near the EUR 1.0b mark as working capital proves less supportive than hoped. Positively, management also opened the door to less capital-intensive decarbonization options, while portfolio optimization (MST sale to close in Q3, HKM) should also remain a priority. We cut our TP to EUR 15/sh (from EUR 16.5/sh); reiterate Underperform rating The FCF pressure is still a clear drag on valuation, despite Salzgitter''s success in securing subsidies (EUR 170m to come in H2). The lack of visibility, highlighted by the painful guidance cut, neutralises the value argument in our view. It is...
What happened? Salzgitter this morning reported full 2Q24 results in-line with the company''s pre-release a month ago, which came below BNPPe/consensus at the time (-18%). The guidance, which was cut last week, was also reiterated. We note that Q2 FCF also came below expectations. BNPP Exane View: With the guidance unchanged and Q2 results pre-released, the only new development was the divisional breakdown and the FCF performance. Positively, steel margins, whilst markedly below peers, came above expectations. But the plate business considerably underperformed even adjusted for the Q2 impairment. Net-net, the earning mix is perhaps less concerning that initially thought. But the cash performance disappointed while the outlook remains challenging. Salzgitter uniquely suffers from a more volatile product mix (plate/tube) and over-exposure to a weaker German market (~50% of group sales). Reiterate Underperform. . PandL: Salzgitter had already pre-released Q2 EBITDA of EUR 107m (versus consensus at the time of EUR 130m) and EBT of -EUR 6m (EUR 21m). By division, we now learn that the miss came from the Steel Processing division, notably due to a EUR 20m impairment of the stainless tube division. Aurubis contribution of EUR 48m was particularly robust. . Cash Flow and Balance Sheet: Net debt ended the quarter at EUR 847m, above consensus of EUR 778m (BNPPe of EUR 843m). Capex came in-line, but a larger working capital build drove the miss. Management notes that the sale of Mannesmann Stainless Tubes should generate EUR 125m in cash in H2. . Guidance: Salzgitter reiterated its new guidance. Two weeks ago, the steelmaker slashed its FY24 EBITDA guidance from EUR 550-625m previously to a much wider range of EUR 400-500m (versus cons. at the time of EUR 564m and BNPPe of EUR 484m). This implies a H2 average quarterly run-rate of ~EUR 83-133m (versus cons. of ~EUR 160m and BNPPe of EUR 117m). The EBT guidance was also cut from EUR 100-175m to breakeven...
Salzgitter is one of the worst performers in our coverage so far this year (-20% YTD). The steelmaker has particularly suffered from its leading exposure to both declining spot HRC margins and a still-sluggish German economy (~50% of group sales). But is it time to revisit the story? We''ve run the numbers and keep our Underperform rating. The lack of visibility, highlighted by the painful guidance cut, neutralises the value argument in our view. The FCF outlook also remains problematic. The steel businesses will fail to make a profit this year; we cut FY24 EBITDA by 30% Two months ago, management banked on a notable surge in demand and a strong recovery in H2. This is no longer the case, with shipments now expected to fall this year and capacity being curtailed. With Trading guided around breakeven, Steel Production margins down YoY and Steel Processing only recovering in H2, the cut to our FY24 forecasts is significant (-30%). We now forecast FY24 EBITDA of EUR565m, at the bottom of the guidance and -20% below unadjusted consensus. Capex may be lower than expected in FY24 but net debt to triple by 2025 as green steel nears If the operating outlook has deteriorated, communication around capital allocation also remains troublesome. Back in Q4, we thought we had finally obtained some visibility on the capex guidance. But the new CFO is now revising investment plans while SALCOS is also facing delays. In order to preserve the initial decarbonisation timeline, however, there is limited room to cut. We expect net capex to average ~EUR0.8bn over the next two years, pushing net debt towards the EUR1.0bn mark. Valuation: we cut our TP to EUR20/sh on the back of lower EBITDA/FCF If there is no pricing/margin recovery in H2, what is left to play for? The FCF pressure is a clear drag on valuation, despite Salzgitter''s success in securing subsidies. And as opposed to peers, the steelmaker suffers from a more volatile product mix (plate/tube) and overexposure...
Despite a strong start to the year, Salzgitter''s guidance clearly disappointed, putting pressure on shares. While full-year earnings guidance still appears well supported, it clearly takes a bit of faith on both the working capital release and public funding timing to get the company FCF positive this year. Salzgitter''s leading spot exposure is now turning into a liability amid the ongoing price correction, and we clearly see better value elsewhere. Reiterate Underperform. Operations: Leading spot exposure is a double-edged sword, we turn more cautious into Q2 Salzgitter has already reached peak margin, dashing hopes of further expansion into Q2 and putting an end to the steelmaker''s noteworthy outperformance. Flat steel prices have dropped more than EUR 100/t over the past month, while long products are also suffering from depressed construction activity. This leaves Salzgitter particularly exposed to the current downturn despite still robust market conditions in plate and improved contribution from the non-steel businesses. A large blast furnace re-line over the summer will add extra hurdles to a seasonally weaker Q3. FCF: We see risks around FY23 working capital guidance and consensus capex It takes a little bit of faith in our view to meet the company''s aggressive working capital guidance for the year (~EUR 500m release), especially given its poor track record. More worryingly, consensus capex is too low in our view (-20% below BNPPe), not properly incorporating recent EAF and DRI orders and perhaps too generously discounting expected public funding. Absent working capital tailwinds, we simply don''t see a way for Salzgitter to turn FCF positive over the next three years. Valuation: Risk reward balance still unattractive, we maintain our Underperform rating We cut our FY23 EBITDA estimate by -3% and stand -7% below consensus (although we are still above the company''s top end of guidance). Salzgitter has underperformed of late, but the...
SZG has been well positioned to benefit from the recent sharp upturn in European sheet and plate markets, but with leading exposure to short term contracts the company now faces max mark-to-market downgrades as margins return to earth after an unprecedented Q1 rally. Meanwhile, FCF performance continues to disappoint, with industry-lagging EBITDA-to-FCF conversion as SZG faces unique working capital headwinds in 2022. SZG shares are undeniably inexpensive, but late in the pricing cycle we continue to see better risk/reward elsewhere. Steel price leverage reversing course, but higher-for-longer outlook prevails SZG was rightly viewed as a key winner during the recent surge in European steel prices with leading exposure to spot sales of sheet and plate. But with prices now falling back to earth at an accelerating rate as panic buying slows following the Russia/Ukraine supply shock and as demand expectations weaken, SZG perhaps has more to lose than contract-oriented peers. While plate margins are likely to stay higher-for-longer given the product''s uniquely elevated dependence on CIS inputs, and we are positive on energy industry capex, continued poor earnings performance in Mannesmann tubes may unfortunately largely mask the improving industry backdrop. FCF generation remains poor entering period of elevated decarbonisation investment Unique amongst peers, SZG''s balance sheet has deteriorated over recent years, and while FCF should finally turn positive in 2022 performance may be weak as decade high earnings are offset by investment in working capital ahead of a blast furnace re-line in 2023. SZG''s recent investments in carbon emissions credits and Aurubis have proven hugely successful, but willingness to monetise remains low. Plans to fully decarbonise and convert to green steel production by 2033 are impressive, but with capex budget yet to be finalised and Germany now lagging other countries confirming state support for green steel there...
The group released a solid set of results for Q1 22 It is maintaining the guidance issued in April We still believe that the current macro context could hurt We will fine-tune our numbers, with no major impact on our target price at first sight
As expected (and communicated in the preliminary results), the FY21 results were very sound. The group benefited from high volumes and sky-rocketing prices. The guidance is supportive, even if it does not integrate the latest geopolitical developments. We are therefore a bit sceptical that the group can achieve its (unchanged) targets for the current year.
The group presented its strategy to reach its 2030 environmental targets. Altogether, it looked like a marketing exercise and we ended up a little bit frustrated by the lack of financial targets, among others. Our numbers will not change after this event.
The Q3 21 came as no surprise after the release of preliminaries in late October. They showed a still strong profitability on the back of firm prices. The market was probably surprised that the guidance was not revised upwards. It may also have to wait for the new CEO to present his strategy in early 2022. We will revise our numbers and valuation upwards on the back of this release.
SZG''s beat in Q2 was mainly the result of elevated inventory valuation gains and equity income, while the core steel business continued to underperform peers, highlighting its longer term contract structure but also the need for value-add investments and cost-saving initiatives. However, we continue to see further upside risk to guidance as we flag the optimistic plate outlook, aided by the new heat treatment line, as well as higher flat steel volumes following the restart of one of Europe''s last idled blast furnaces. We particularly await SZG''s new CEO strategy, to be unveiled in 1H22, to obtain more clarity on the company''s decarbonization plans and any potential restructuring. Trading, Aurubis drive Q2 beat. Steel operations to improve in H2 Steel operations disappointed in 2Q21 as SZG suffered more than expected from its contract and automotive exposure, on top of additional supply disruptions (50kt lost due to a lightning strike). Moving forward, FY21 EBT guidance of EUR 400-600m is left unchanged, although management is now confident in reaching the top end, where we (EUR 640m) and consensus (EUR 654m) already are. Positively, H2 earnings contribution will shift from Aurubis and Trading to Strip Steel (restarting a 600kt furnace in November) and Plate and Section, back to profit only for the second time over the past nine years (despite continued weakness on large diameter pipes). More importantly, SZG''s new CEO will unveil his strategy in spring 2022. The group''s portfolio, organization, management structure, reporting and decarbonization are notably on the table. New corporate strategy to confirm decarbonization timeline/budget We expect capex to catch up in H2 to meet the company''s full-year guidance of EUR400m while cash tax payments should also be on the rise. Positively, SZG expects a release in working capital in H2. Meanwhile, the steelmaker is still weighing its options regarding decarbonization (location of DRI plant)...
The H1 21 numbers came in roughly in line with the street’s expectations The results were driven by the Strip Steel and Trading business units as well as the strong contribution from Aurubis The net financial position is stable despite the pick-up in activities The value of the CO2 allowances procured by the EU greenhouse gas emission trading scheme starting in 2021 amounts to almost €1bn The new strategy is to be presented by the incumbent CEO in spring 2022
Q1 21 results (already partly released on 25 April) came in above consensus Almost all segments did well on higher volumes and prices The group substantially raised its full-year guidance The contribution of Aurubis was also substantial We will adjust our numbers and target price
SZG offers attractive leverage to the ongoing record steel up-cycle with Sheet profitability largely de-risked through Q3 and an increasingly optimistic outlook for plate following years of pain. SZG''s leading energy exposure remains a unique headwind vs peers, though this too is beginning to inflect. While we see further upside risk to guidance, FCF generation remains lacklustre vs peers. Strong leverage to Strip Steel recovery SZG remains well positioned to benefit from the current up-cycle given its shorter-term contract structure than many peers, and the company''s Strip Steel business should see sequential margin expansion through Q2/Q3. The decision to restart SZG''s last idled blast furnace (600ktpa capacity) by Nov reflects weakening supply-side tightness forecast into H2, but in the currently undersupplied market and with peer outages nearing, the decision is justified. Interestingly, while SZG has in the past benefitted from significant raw material hedging gains, management flagged more neutral contribution at present as record iron ore is offset by coal weakness. Plate market coming back to life but Oil and Gas demand still poor After years of pain, plate is surging back to life led by a combination of recovering real demand, speculative pro-cyclical buying and an end to destocking, with earnings set to recover from Q2. However, SZG remains cautious on energy-related demand with large diameter pipe the lone product area with still weak demand, though a slightly improved outlook. For plate, we are hopeful that growth in wind power may emerge as a key structural demand driver in the coming decade. Decarbonisation in focus As carbon costs surge, SZG is uniquely well positioned with a large hedged position covering the majority of its carbon credit shortfall through 2030. SZG''s outgoing CEO notably talked down the benefits of a proposed carbon border tax given fear of retaliatory measures and a ''bureaucratic monster'' instead...
With steel prices regaining momentum in Europe, SZG provides attractive leverage to the domestic strip steel market. Positively, management fails to see any crack on the horizon and expects full utilization in coming quarters. However, we still remain concerned by headwinds from leading oil and gas end market exposure which will endure in FY21 and keep the plate and tubular businesses in negative EBT territory. Although we revise our estimates upward, FCF will remain under pressure as capex stays elevated while working capital pressure builds amid surging prices. Stripped out from non-recurring items, Q4 unveils lacklustre performance 4Q20 results displayed poor operational performance buried under a plethora of one-off effects. Excluding the benefits from the real estate and provision gains of EUR 65m as well as a negative capital gain tax impact of EUR 25m, SZG''s EBT performance was actually still negative in the quarter, well below earlier expectations. Despite generally shorter-term contracts, the sequential recovery in SZG''s steel margins lagged industry peers, disappointing hopes of stronger leverage. Quantitative guidance clashes with forward-looking commentary For a company known for being conservative, management painted a rather bullish picture of the market. Optimistic for Q1 absent of ''force majeure'' headwinds, SZG sees order books full up to Q2 and expects utilization high into H2. Plus, imports are nowhere to be seen. However, SZG, true to its style, decided not to hike its EBT guidance of EUR 150-200m that we now easily surpass on a still very conservative commodity price deck. FCF burn to continue into FY21 following capex hike; downside risk to working capital build Despite having well managed working capital into year-end, management can do little to shield from the effects of surging steel and raw material prices. As a result, and due to the unexpected increase in capex, the FCF burn should continue into 2021 (7th...
FY20 in line with preliminary results The operating cash flow has turned positive in Q4 No dividend to be paid for FY20 The group’s forecasts may look conservative The group insists on its green initiatives We will revise upwards our cautious forecasts
While SZG provides attractive leverage to the improving European strip steel market, we remain concerned by headwinds from leading oil and gas end market exposure and take a more cautious view than management on the speed of recovery. Although earnings should grow in Q4, FCF remains negative, further impairing SZG''s once best-in-class balance sheet. Q4 guidance conservative with upside driven by property sale gain While SZG''s revised FY20 EBT guidance ostensibly implied an upgrade vs prior (though still modestly lower than consensus), disclosure on the earnings call that guidance incorporates a EUR ~50m property sale gain implies underlying operations have disappointed. Management has a track record of guiding conservatively with hopes to subsequently beat, and we think Q4 is no exception. On our updated estimates, we forecast FY20 EBT up +22% YoY vs guidance stable. Strip Steel benefitting from market tailwinds, autos recovery Beating many industry peers, SZG saw Q3 Strip Steel shipments surge +38% QoQ, and with order intake back at pre-COVID levels and lead times extending we have confidence SZG should see deliveries remain robust into Q1. SZG''s generally shorter-term contract structure than peers should drive a strong sequential margin recovery starting in Q4, though we note guidance for Q4 EBT close to break-even is not yet particularly compelling. Even with demand recovering, SZG retains an idled blast furnace, preferring instead to insource semis from JV HKM, providing optionality into 2021 and/or a sign of caution should the recent restocking cycle begin to fade. Oil and gas remains a meaningful drag Poor demand from oil and gas customers remains a significant drag on SZG''s plate, Mannesmann and EuroPipe businesses, and we have a slightly more cautious outlook for 2021 than SZG management as industry capex is likely to remain depressed. Interestingly, SZG has a more optimistic outlook for line pipe over plate and for the US over Europe....
