EUR 103.50 For Business Accounts Only

ERDEMIR 4Q18 Earnings: A strong quarter, above estimates

EREGLI 4Q18 Earnings: A strong quarter, above estimates

• Erdemir reported TL1,684mn net income in 4Q18 (up by 41%, y/y), above consensus estimate of TL1,356mn (BGC: TL1,400mn), supported by a) tax income rather than an expense in 4Q, b) better operational performance. Due to IFRS regulation, Erdemir requires to recognize FX difference as a tax base (due to US$ functional currency). In 3Q18, because of TL’s rapid and sizeable deprecation, the company recorded US$100mn loss on FX difference; however, it has mostly reversed in 4Q18 thanks to recovery in TL against US$, and the company posted TL82mn tax income vs. our TL254mn expense estimate.
• Operationally the performance was also strong. EBITDA margin of 29.2% in 4Q18 (3Q18: 32.9%, 4Q17: 31.8%) was slightly better than expected (consensus and BGC: 28.1%). Top line, on the other hand, was above estimates at TL7,594mn (up by 40%, y/y) vs. TL7,081mn consensus estimate (BGC: TL6,555mn). All in all, Erdemir’s EBITDA of TL2,216mn in 4Q18 was better than consensus estimate of TL1,995mn (BGC: TL1,845mn). EBITDA per ton was at US$181 in 4Q18 (still a robust level), vs. US$225 in 3Q18 and US$191 in 4Q17, due mainly to declining trend in steel prices, as expected.
• Erdemir’s net cash increased very slightly to TL2,599mn in 4Q18 from TL2,563mn in 3Q18 (2017-end: TL2,545mn).
• We think that 4Q18 results are slightly positive due to strong bottom line and operational performance. Strong bottom line also elevates hopes for a strong dividend distribution (BGCe: 14.1% gross yield). 1H19 performance of Erdemir should be weaker due to on-going weakness in global prices, but a recovery is likely in the second half under current outlook. We maintain our BUY rating with 35% upside potential. Analyst meeting will be held today at 2:00pm in Istanbul.