EMEA Steel Sector: Inflexion point – buy the dip (NLMK and Erdemir upgraded to BUY; MMK and FXPO stay BUY; EVRAZ downgraded to HOLD; SVST stays HOLD)
The EMEA steel sector has sold off significantly in the past five months as steel prices declined, before a USD 30/t rally in Black Sea export prices in the last month. However, if spot prices remain, there is still potential downside in the sector as spot valuations remain stretched (5.6-6.6x 2020E EV/EBITDAs, 6.1-10.6% dividend yields for the Russians, 12.9x and 3.6% for Erdemir) and we would not rule out a further short-term correction. However, we expect regional steel prices to recover. With organic growth measures, this should result in 26-76% growth in EBITDA between 2020E and 2024E, returning dividend yields to 10-17% by 2024E based on our long-term “mid-cycle†price assumptions. We would use any short-term weakness in the shares to gain exposure to this recovery. Our top picks (in order of preference) are Erdemir (BUY, price target (PT) TRY 10.64/share), NLMK (BUY, USD 23.9/GDR) and MMK (BUY, USD 9.55/GDR). We rate Severstal and EVRAZ HOLDs, with PTs of USD 15.3/GDR and GBp 388/share respectively. We also maintain our BUY on Ferrexpo, with a lower PT of GBp 195/share, due to the recent fall in pellet prices.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.
Evraz engages in the production and distribution of steel and related products and coal and iron ore mining. Co. also produces vanadium products. Co. has four segments: Steel, which includes production of steel and related products at all mills except for those in North America, and includes the extraction of vanadium ore and production of vanadium products, iron ore mining and enrichment and certain energy-generating companies; Steel, North America, which includes production of steel and related products in the U.S. and Canada; Coal, which includes coal mining and enrichment; and Other operations, which includes energy-generating companies, shipping and railway transportation companies.
Ferrexpo is an iron ore pellet producer. Co. produces, develops and markets its product for sale to the metallurgical industry. Co. operate two mines and a processing plant near Kremenchug in Ukraine, and an interest in a port in Odessa. Co. also owns logistics assets in Austria which operate a fleet of vessels operating on the Rhine and Danube waterways and an ocean-going vessel. Co.'s operations are integrated from iron ore mining through to iron ore concentrate and pellet production and subsequent logistics. Co.'s mineral properties lie within the Kremenchug Magnetic Anomaly and are being extracted at the Gorishne-Plavninskoye and Lavrikovskoye and Yeristovskoye deposits.
WOOD & Company is the leading investment bank in Emerging Europe. Founded in 1991 and head-quartered in Prague, our footprint spans the region and touches investors around the globe.
A pioneer in Emerging Europe, WOOD executed many of the first CEE equity trades and landmark investment banking transactions. Our electronic trading platform was the first in the region, and remains the best. We are continually expanding our relevance and reach in these ever-evolving markets.
Our equity market share reflects our stature: 7% in Warsaw, 20% in Bucharest, 16% in Hungary, 40% in Prague and 5% in Vienna. Our distribution is unparalleled, with the largest salesforce in the region, servicing a uniquely diverse investor base.
We couple local expertise with a truly international perspective. With offices on the ground in the region, and in key financial hubs such as London and Milano, we are never far from our clients and we remain at the forefront of what’s afoot in the CEE emerging and frontier landscape.
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