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01 Jun 2023
Near-term risks, long-term hurdles
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Near-term risks, long-term hurdles
Salzgitter AG (SZG:ETR) | 0 0 0.0%
- Published:
01 Jun 2023 -
Author:
Gresser Tristan TG | Wang Xin XW -
Pages:
11
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...