CEO sees triple-digit million pre-tax profit in 2017
06 Feb 17
CEO Heinz Jörg Fuhrmann said in an interview that 2017 is likely to be the fourth consecutive year with improving profits. After indicated pre-tax earnings of between €30m and €60m for 2016, he cannot exclude a triple-digit number for the current year. Higher sales prices (as a result of import duties) combined with efficiency gains are the reason for his optimism. The CEO’s projections are no better than what we currently expect. In fact, we are forecasting a triple-digit million pre-tax profit of €106m for 2016 (preliminary numbers will be out on 28 February). This profit number includes at-equity earnings as Salzgitter is calculating it the same way. For 2017, we see this number rising to €189m. Conclusion: the CEO’s 2017 projection is the minimum Salzgitter should achieve. In spite of this, none of our target prices shows any share price appreciation potential and, although we see the EBITDA margin to increase from less than 6% in 2017 to almost 9% until infinity, our DCF model suggests that the shares are clearly overvalued.
Historic inventory had to be re-stated
10 Nov 16
Salzgitter’s revenue continued falling by 12.4% in Q3 (to €1.89bn) thus bringing the 9M number to €5.86bn (-12.4%). Based on the numbers management released a year ago, EBIT turned around from a Q3 15 loss of €50m to a profit of €28m. As a result, EBIT was up by 25% to €80m through to September whereas the 9M EBT number was down by 12% to €21m. The revenue number fell clearly short of our projection (€6.18bn) while the two profit numbers are higher (€67m and €19m, respectively). Cash generation was, however, very poor. Salzgitter typically generates high cash from operations (based on management’s definition) in Q3, but not this year. In fact, it was down by 98% to €3m only and the 9M number was a negative €3m, which is only the second time this century that it was negative after 9M.
Results were again very poor in Q2
10 Aug 16
Salzgitter’s revenue fell by 6.4% to €2.1bn in the last quarter which brought the H1 number to slightly less than €4bn (-12%). The respective EBIT numbers were -71% to €19m and -55% to €52m, i.e. Q2 EBIT was down by ‘only’ 31%. H1 net profit after minorities was €7m (-82%) and the total comprehensive loss amounted to €226m as the lower discount rate for calculating pension obligations (1.25% instead of 2.25% used at the end of 2015) resulted in a loss of €340m (before deferred taxes) and of €267m after tax. As a result of the hardly visible net profit of €7m and the comprehensive loss, the group’s shareholders’ funds have fallen by €238m to €2.65bn in H1 16. Pension provisions of €2.65bn are now, and for the first time, matching shareholders’ funds.
Q1 was a genuine disaster
13 May 16
Salzgitter’s revenue fell by 18% to €1.87bn, EBIT was down by 71% to €19m and pre-tax earnings collapsed by 94% to €3.1m. The group showed a net profit of €1.0m (€32.7m in Q1 15) but, after minorities, this translates into a loss of €0.1m. In fact, this was only achieved by booking a profit of €3.8m from discontinued operations, whereas this number was a negative of €12.2m a year ago.
Q1 16 pre-tax profit down by 94%
26 Apr 16
Salzgitter’s ad-hoc release indicates a pre-tax profit of €3.1m has been generated in the first quarter compared to €52m a year ago. The operating result has most probably been negative as the aforementioned profit number includes an at-equity profit of €12m from Aurubis compared to €3m a year ago. For the full-year, management’s guidance is for an ‘about break-even’ operating result. This will depend on when and which import duties are imposed by the EU. In addition, this guidance does not include further ‘one-off’ restructuring costs. As these costs have occurred regularly in the past and are likely to occur in the future as well, we do not regard them as one-offs.
Nothing but lip service
21 Mar 16
To improve the group’s resilience against Chinese steel imports, management has announced another cost-cutting exercise. Several hundred employees will have to leave four plants which employ a total of 1,900, out of a worldwide workforce of around 23,500 (the average was 23,677 in 2015). Assuming management is talking about 300 jobs, the cost savings will amount to some €20m or 0.2% of revenue. This is a very small number indeed and the past has shown that Salzgitter has never reduced the workforce. In fact, it was marginally up while personnel costs increased by 3% in a year when revenue fell by almost 5%. Since 2011, the last year when Salzgitter generated albeit a small but positive bottom line, the revenue number has now fallen by more than 12% but the average workforce increased by 1%. Consequently, personnel costs increased from 15.4% of total output in 2011 to 19.2% (it was 17.6% in 2014). In our opinion, it is the shareholder structure that prevents the group from genuinely reducing personnel costs. The State of Lower Saxony, which holds a blocking minority stake of 26.5%, has no interest in seeing unemployment rising. This pressing problem becomes all the more severe as VW (which is also controlled by this State) is also threatening to reduce employment. Consequently, only a genuine steel demand recovery will allow Salzgitter to return to reasonable profits, but this is not (yet) visible.
Pre-tax profit of €13m yields a net loss of €46m
26 Feb 16
Salzgitter had released indications for 2015 on 28 January. At that time, it projected the above pre-tax profit but did not give any net profit number. However, it had communicated in mid-January, that income tax charges would be higher than previously expected as Germany’s Upper Financial Court had made a decision that also impacted Salzgitter’s accounts. However, the additional tax charge mentioned then was €25m. Today’s release translates into total income tax charges of €58m. This includes €27m extra income tax charges relating to cum-ex dividend stripping activities of Salzgitter’s past.
Our latest and reduced 2015 pre-tax profit projection was not achieved.
28 Jan 16
The company’s latest ad-hoc release shows a pre-tax profit number of €12m whereas we had forecast €28m. Salzgitter will release preliminary numbers on 26 February. In addition, Aurubis (25% controlled by Salzgitter) has released a preliminary pre-tax loss of €34m for its Q1 2015/16 (FYE 30/09). Management blames lower metal prices for this disappointing number. Excluding the revaluation of inventory the pre-tax result was positive at €36m compared to a profit of €39m a year ago.
Another net loss likely in 2015
15 Jan 16
A complicated tax decision by Germany’s Upper Financial Court has forced Salzgitter to increase its 2015 tax expenses by some €25m. As the pre-tax result is expected to come in at a low double-digit million euro amount, the net result is likely to be negative versus our currently-expected profit of €17m. This will take its toll on the group’s book value but not on EPS. As these tax charges concern past fiscal years, we will adjust the charges when calculating our EPS. As a result, our target price will see no material change.
Prices falling everywhere
12 Nov 15
Unlike Voestalpine, Salzgitter shows falling prices in just about all of its divisions. Consequently, consolidated revenue fell by 4.5% to €2.16bn in Q3 and by 1.8% to €6.69bn ytd. EBIT amounted to a loss of €50m in the last quarter (profit of €35m a year ago) and it is now down by 15% to €64m ytd. Even more discouraging is cash generation. Based on management’s definition, cash from operations has fallen by almost 50% to €173m through to September.
Management returns to its previous (lower) profit guidance
06 Nov 15
Salzgitter will release final 9M 15 numbers on 12 November but management has released a few numbers already which are all clearly below our expectations. Instead of revenue of €6.77bn, the sales number came in at slightly less than €6.7bn. Pre-tax earnings were €24m (i.e. a loss of €56m in Q3) instead of our expected €80m. Management blames lower metal prices for the above profit setback. This relates to Salzgitter’s stake in Aurubis and the related at-equity result which amounted to a profit of €42m in 9M 14 and now amounts to a loss of €13m. Because of the above dismal numbers, management no longer expects the full-year pre-tax result to come in at a low-to mid-sized double-digit number. The new guidance, which was also released earlier this year, is for a low double-digit number, i.e. we have to reduce our projections considerably.
Salzgitter might eventually acquire all of the Aurubis shares.
28 Sep 15
In an interview, Salzgitter’s CEO Fuhrmann suggested that a full takeover is perfectly possible one day and that this makes economic sense. He excludes a merger with ThyssenKrupp. He also indicates that Salzgitter will raise its dividend in the future which we expected. While the company is unlikely to raise it for 2015, as management expects Salzgitter to suffer a loss in H2 15, we see it as being raised from €0.20 paid for the years 2013-15 to €0.30 for 2016 and to €0.40 for 2017. It paid €0.45 for 2011 when adjusted EPS was on a level that we forecast for 2017.
Salzgitter closes sheet piling production
01 Jul 15
In spite of heavy restructuring efforts, as management had called them in the past, the activity has not been able to turn around. Consequently, the operation (some 350 employees) will be closed and the associated closure costs are assumed to amount to some €50m in 2015. In spite of these additional costs, management is not changing its pre-tax profit guidance for the full-year which is expected to amount to up to €50m.