Cognor – Steel Sector Pickup Outweighed By Costs
The steel sector has recently offered reasons for cautious optimism, owing to a pickup in China, where the steel PMI moved higher in November, accompanied by a reduced inventory and upward-trending prices. Nevertheless the operating conditions remain challenging, and in a tight market Cognor faces additional pressures in 2020 stemming from rising costs of electricity (+PLN 30.8m) and labor (+PLN 3.5m). Consequently, according to our estimates, Cognor's EBITDA next year might fall by as much as 29% relative to 2019, in turn driving the net debt/EBITDA ratio for the year to 2.9x, and potentially restricting the capacity for dividends; our assumption (based on shares currently outstanding) is that the 2020 payout will be cut to PLN 0.11 per share from PLN 0.28 offered this year. We changed our recommendation for Cognor to hold, and revised our target price to PLN 1.25 per share, in our 2020 Investment Strategy issued on 5 December. In this report, we provide a more extensive analysis of the factors behind our current outlook.
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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