JSW - Riding a Steel Demand Upswing
World demand for steel is recovering in step with a revival in manufacturing, and as a result in Europe we have witnessed a restart lately of a host of steel plants including ArcelorMittal in Belgium, Spain, and Italy, and VoestAlpine in Austria and Slovakia Increasing steel production in turn drives demand for metallurgical coke, whose price in the European market has reached €320-330/t compared to €230 last November, and is expected to hit $400 soon. All this makes very favorable market conditions for coke producers like JSW. Furthermore, increasing steel orders in a period of uncertain weather in the Australia region have caused the Australian coking coal benchmark to jump to $160/t in the last few days from a recent average of $100. If these business conditions were to last, JSW could easily generate more than PLN 2 billion EBITDA in 2021, and with reduced inventories, despite CAPEX estimated at PLN 1.9bn, the Company could achieve positive free cash flow as high as PLN 650m this year (PLN 3/share). We have raised our 2021 coke production and sales forecasts for JSW by 11% and 13%, respectively. On our current estimates, JSW stock is trading at a discount of about 50% to the 2021-2022E P/E and EV/EBITDA ratios of comparable companies. Shares in JSW have soared 34% since the beginning of the year, but to us they have potential to grow by another 33% before reaching our new target price of PLN 46.40. We maintain our buy call for JSW.
Jastrzebska Spolka Weglowa is a producer of type 35 coking coal (“orthocoking coal” according to Polish Standard). The main line of Co.'s business is also the mining and sales of steam coal. Co. is also central for selling all coal derivative products, i.e. coke and hydrocarbons produced by coking plants owned by the JSW S.A. Capital Group. The mining area is located in the Upper Silesian Coal Basin. The principal clients for Co.'s products are located primarily in Poland, Germany, Austria, the Czech Republic, Slovakia, and also India and Brazil.
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