Stalprodukt: Looks good on all fronts
We initiate coverage of Stalprodukt with a BUY recommendation and a FV of PLN 687 per share (+32% upside) stemming from a positive outlook on all three segments the company operates in. First of all, we think that in the next couple of years STP’s zinc segment will benefit from acute zinc concentrate shortages supporting high market prices. We also disagree with the commonly held view that closure of the Olkusz-Pomorzany mine would mean the end of the zinc segment and a significant drop in the Group's overall financial results. We believe that the new hall tank investment along with a forecast mid-term drop in coke prices and normalization in Treatment Charges will allow the smelting division to make up for the mining segment profit loss. We also expect the recycling division (Boleslaw Recycling, post-flotation tailings) to significantly improve its results in the mid-term as hedges set up at lower prices 2-3 years ago (USD 2,000-2,200) will be realized and replaced by derivatives with a significantly higher strike price. All in all we estimate the zinc segment’s gross profit to peak in 2019E at PLN 480m compared to PLN 433m in 2018E. In 2018 we believe the Grain Oriented Steel segment will rebound from its 2017 trough (gross profit of PLN 92m vs PLN 53m in 2017) and that the steel profiles segment will see a recovery from road investment-induced demand for road safety barriers. On our numbers, STP trades at low 17E/18E EV/EBITDAs of 4.8x/4.9x, at a ca. 30%/20% discount to zinc/steel int’l peers which we find unwarranted given Stalprodukt’s well diversified business model that is able to capitalize on different market scenarios, especially in the zinc market.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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