Cognor - Riding Steel Price Rally Into H1 2021
The first half of 2021 might mark a return to form for Cognor looking at upward-trending prices of steel products, including billet and rebar, which in Europe have enjoyed an even stronger rally since the January imposition of export tariffs (up to 13% and 12%, respectively) by Russia. As a result of an unexpected surge in demand, steel in Europe has been in short supply, and the start of the construction season will soon begin drawing near. Under these circumstances, Cognor is benefitting from its vertical integration with Złomrex, the scrap supplier responsible for 25%-50% of all input deliveries that still has cheaply-acquired inventory to draw on. We are expecting Cognor to generate EBITDA of PLN 158 million in FY2021, resulting in a lower ending leverage ratio of 1.0x. If this is correct, in 2022 Cognor would have the means to pay cash dividends of PLN 0.25 per share, offering an implied dividend yield of 12%. Furthermore, in the two years from 2021 to 2022, Cognor has the capacity to generate free cash flow-to-enterprise value higher than 16%, and yet its stock is currently trading at an average discount of 40% relative to peers. In the coming days, COG might register a decline due to an expected conversion of its Exchangeable Notes in the third week of February. Of a total of €17.3m Exchangeable Notes issued, we believe bondholders holding no less than €3m might opt to convert at PLN 1.61 a share, generating downward price pressure which we would use as an opportunity to buy shares in Cognor. We have revised upwards our FY2021 and 2022 earnings forecasts for Cognor, resulting in a higher target price of PLN 2.89 – a target which indicates plenty of upside and still warrants a buy call even after COG doubled in value since our last rating in December.
Cognor Holding SA, formerly Cognor SA, is a Poland-based company that operates in the steel industry. The Company's activities are divided into four business segments: Scrap, Production, Distribution and Other. The Scrap division focuses on buying, processing, refining and selling of scrap metal and nonferrous scrap. The Production division is responsible for processing scrap metal into steel billets, as well as converting steel billets and nonferrous scrap into finished products. The Distribution division sells various commodities, such as steel products, steel and nonferrous scrap and steel billets. The Other division includes materials recycling, among others. The Company's products range comprises metal bars, steel sheet, plates, pipes and rods, as well as sheet zinc and tin plates, among others. It operates through a number of subsidiaries, such as Cognor Blachy Dachowe SA, Zlomrex Metal Sp z o o and Huta Stali Jakosciowych SA. The Company is controlled by PS Holdco Sp z o o.
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