Cognor – Bracing for Deadlock
The coronavirus crisis is having an immense negative impact on the steel industry, creating a global glut evidenced by growing stockpiles in China (currently at over 20mmt vs. a five-year high of 15mmt recorded this time of the year). As rebar prices fall, so do the profit margins of steelmakers. In addition, in Q1 2020, electric arc furnaces (EAF) of the kind used by Cognor lost much of their previous cost advantage over basic oxygen furnaces (BOF). We update our FY2020 forecasts for Cognor to assume a 9% decrease in sales volumes due to weaker demand, accompanied by a PLN 138m reduction in operating profit driven by lower sales prices. Further, with no state compensation offered this year for high electricity prices, expected to rise 7% relative to 2019, Cognor faces additional costs of a projected PLN 17m. On the upside, the Company might achieve savings thanks to lower prices of graphite electrodes used in EAF steel making (PLN 60m), improved performance after investments (PLN 31m), and lower costs of payroll and services incurred on lower sales (PLN 30m). Nevertheless we see FY2020 EBITDA as falling 30% to PLN 70m, resulting in a higher-but-still-safe leverage ratio of 3.5x. Regardless, Cognor will probably put shareholder distributions on hold for the foreseeable future. After updating FY2020 estimates, we lower our target price for COG from PLN 1.25 to PLN 0.94 per share, and we maintain a hold rating on the stock.
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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