Erdemir (EREGL TI) - Preparing for the worst: Maintain Buy
Preparing for the worst
Following containment measures since the Covid-19 outbreak and plunge in oil prices which indicate sluggish steel demand outlook, we lower our 12M TP (based on a weighted average of DCF and international peer multiples; assumptions unchanged) by 31% to TRY10.38, owing to lower profitability, related to weaker steel prices, and updated macro forecasts. While short term interest on the stock should might be limited due to discouraging demand outlook, we believe that its risk/reward profile remain attractive at the current level. Similar to its European counterparts, we expect Erdemir to respond to the drop in demand, related to the Covid-19 outbreak, with production cuts. We cut our sales volume forecast by 18% to 7m tons in 2020, which would be the lowest since 2011.
Erdemir reported net income of TRY300m in 1Q20, in-line with our estimate of TRY316m, but 36% lower than RT consensus of TRY468m. Relatively weak bottom-line growth was attributable to significantly higher effective tax rate of 64% (vs BNPPe of 55%), as broadly expected. Operationally, 1Q20 EBITDA of TRY1b came in-line with our estimate and RT consensus of TRY1b.
Eregli Demir Ve Celik Fabrikalari is engaged in the production of iron and steel rolled products, alloyed and non-alloyed iron, steel and pig iron castings, cast and pressed products, coke and their by-products.
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