JSW: Still undervalued despite rally (BUY - reinitiation of coverage)
We are reinitiating coverage of JSW with a BUY recommendation and a PLN 103/share price target (PT). We do not believe that coking coal prices are sustainable at current levels, but the reduction in Chinese output should sustainably tighten the market, and support prices above USD 120/tonne, preventing a return to 1H16 price levels, in our view. JSW’s restructuring programme has lowered its FCF breakeven level to USD 100/t, according to management, which should be enough for JSW to remain a viable going concern in the future. Although we expect prices to return towards the top of the global cost curve at USD 120-130/t during 2017E, we believe the average benchmark price in 2017E will be USD 170/t, as mine supply will take time to return to the market. Given JSW’s relatively low level of net debt (PLN 924m, 1.7x LTM EBITDA), on our calculations, it should only take two quarters of strong cash flow at current prices to eliminate this debt and any covenants associated with it, placing JSW on a secure footing. We do see risks of cost creep due to the reversal of union pay concessions happening sooner than previously agreed, higher-than-guidance capex and of JSW’s cash flow being used for government strategic purposes. However, we believe the discount vs. its peers and its DCF value are too high at present.
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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