Stalprodukt: Down but far from out
We reiterate our BUY recommendation for Stalprodukt but lower our FV considerably to PLN 362.69 per share from PLN 611, mainly on the recent underperformance of the zinc segment stemming from lower than expected mine production at the Boleslaw mine. Nonetheless, we still like STP because of: 1) its cheap-looking multiples; 2) forthcoming ramp-up of the new tank hall project; and 3) possible mine extension in the Laski mining area, although our base-case valuation does not include this project. We assume a long-term zinc price of USD 2,400/t, although we believe prices may surprise positively because of 3M-spot record backwardation on LME and SHFE and official inventories are still at their lowest levels for 10 years. As for the TC global benchmark in 2019, after 67% growth in the contract fee in the agreement between TECK and Kora Zinc processing premiums for STP will be very likely higher yoy. Also more favourable hedging terms are going to apply in 2019 vs 2018. From the other side we incorporate a ca. 20-25% higher electricity cost in 2019 vs 2018. In the area of electrical steel Stalprodukt is feeling the pressure from competition although the European GOES steel benchmarks are resilient yoy. Even though STP has disappointed the market a couple of times over the last 12 months, we believe its current market valuation is unjustified vs its intrinsic value. STP trades at a low 19E/20E EVEBITDA of 1.7x/1.5x, a ca. 60% discount to international names which we find unwarranted.Stalprodukt S.A. is a manufacturer and exporter of highly processed steel products such as electrical transformer sheets and strips, cold formed profiles and tubes, hot- and cold rolled sheets and strips, road safety barriers and toroidal cores. Co. also possesses its own well-developed distribution network of metallurgical products. It consists of wholesale warehouses and offices in several cities in the territory of Poland. Co.'s warehouses managed by Stalprodukt-Centrostal Krakow sp. z o.o. With regard to IT applications, Co. remains in the broadly understood metallurgical branch.
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