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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...
Salzgitter AG
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....
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