EUR 150.00 For Business Accounts Only

JSW SA: Pricing reasonable, but risks galore

We downgrade our recommendation for JSW from BUY to NEUTRAL, cutting our FV from PLN 102.6 to PLN 62.39 per share which implies 4% upside. We see considerable risk of Chinese new coal capacity coming online in 2019 stifling seaborne trade and by extension benchmark prices. Also, looking at historical patterns (the last six years) the spot coking coal price fell by around -12% on average in the 2 months following the Chinese Lunar New Year. On top of that we think current trends in the Chinese residential market look unsustainable in the mid to long term as the vacancy rate is on the rise and in 2018 investment-driven housing purchases overtook residential-driven demand in the transaction structure. Since Chinese real estate is the biggest steel-consuming industry in the world, we think that a possible slowdown may have repercussions in the coking coal market. Regarding company-specific factors we see the risk of rising costs, especially a pay rise for workers and the electricity bill, which in total may cost JSW an additional PLN 700m in 2019 (10% of total costs). Looking at multiples one cannot help but get the impression that the stock looks cheap (2019E, 2020E EV/EBITDA below peers). However in the light of poor 2019E FCF generation and a worryingly high operational leverage level, we think a considerable discount vs peers is fully justified. Even though we do not assume such a scenario, we see a small risk that in the event of the Praire or PBSz acquisition, a smaller or no dividend could be paid from 2018 profit.