EUR 21.66 For Business Accounts Only

TUBOS REUNIDOS: too many known unknowns. We initiate with a Hold (Bankinter Securities)

The main points of our research are:

•  After the US shale market crashed in 2016, Tubos Reunidos management took some time to readjust. After changing its leadership it unveiled a turnaround plan (Transforma 360º) with the ambitious goal of reaching at least an EBITDA of €45mn within two years, thanks to improved commercial activity (i.e: moving its geography-focused approach to a sector-based one), increased operating efficiency (i.e: reduce operating costs per ton by at least 10%) and improved productivity (i.e: change the mentality from volume and revenues to profitability). Overall, it is a tall order. About 33% of the improvement has to come from a new commercial platform and another 30% from lower labour costs. This turnaround plan has more than 300 initiatives supervised by more than 100 people.
•  One problem is overcapacity. Despite a -60% reduction in oil prices (from June 2014 to June 2017), and -43% in rigs worldwide, production tubes only fell by -23% from peak (2014) to through (2016). Would US tariffs fix the imbalance? It is difficult to say if the latest moves from the Trump administration would lead to further unilateral US moves on trade or if it is a “shot across the bow” to force China and South Korea to the negotiating table is anyone’s guess. Our view is that basing an investment decision on future Trump policy could turn out disappointing results.
•  Another problem is that Tubos Reunidos manufactures in EUR, while competitors produce either in USD or low-cost countries. Already the EURUSD currency exchange used for its Transforma 360º turnaround plan (1.13) has worsened to 1.245, putting more pressure on management to deliver.
•  We value Tubos Reunidos using a DCF method with a weighted average cost of capital of 7%. We come up with a €0.81/share valuation (December 2018), or a 9.5% upside potential, which we think it is not enough to outweigh the current risks. This equity valuation implies -14.4% discount to current book value per share. It compares to a median of 1.26x for the peers we have mentioned in this report. We believe this implied discount to peers reflect the fact that TRG faces a more challenging scenario due to its production in EUR or the lack of some value-add services. We start our coverage with a Hold recommendation.