Cognor – Attractive despite declining results
The weaker environment in the steel industry in H1 2019, in our opinion, will result in a clear drop of earnings in 2019 from the record-breaking level delivered a year earlier. In our view, the lower sales volume (2% y/y) combined with the decrease in market spreads will result in about PLN 46m reduction of the result. In addition, electricity costs are expected to be higher (+ PLN 35m) as well as payroll costs (+ PLN 10m). Despite the expected nearly 50% decrease in EBITDA in 2019, Cognor will continue to generate approximately PLN 60m in free cash flows (FCF) over the next three years, which will lead to a large dividend stream for shareholders. The right to dividend PLN 0.30 per share for 2018 will be cut off in September, which with a current number of shares gives Dyield at the level of 19% (the highest on the WSE). We assume that with an average annual EBITDA of approximately PLN 100m, the Group is able to maintain the dividend rate of around 10% in 2020 and 2021. While we still expect poor financial results in Q2, in H2 2019 the Cognor Group will benefit from the closure of the Arcelor Mittal blast furnace in Krakow and from the observed increase in the competitiveness of electric arc furnaces (EAF) over basic oxygen furnaces (BOF). After the share discount, we maintain our positive view for the Cognor Group (now accumulate, previously overweight), and we set the target price @PLN 1.79 per share.
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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