Event
In this report, we discuss recent steel sector developments, update our outlook/
estimates, and preview Russel Metals' Q1/22 results (May 3 release).
Impact: POSITIVE
We are upgrading our recommendation on Russel Metals to BUY (from Hold).
Our upgrade reflects various considerations, including: 1) an upturn in key North
American steel prices since early-March; 2) the recent emergence of several trends
within the North American steel market that we see as supportive of steel prices and
Russel's outlook; 3) our above-consensus estimates for Russel; and 4) recent RUS
share price and valuation underperformance.
Increased steel prices: U.S. HRC peaked at US$1,960/t in early-October 2021
and then declined ~US$1,000/t over the ensuing five months. However, HRC found
a bottom in early-March 2022 and has risen ~50% since (now at US$1,500/t),
supported in part by increased raw-material prices. U.S. carbon plate prices have
also risen of-late (albeit less so, as they did not decline as much in late-2021/
early-2022).
Steel market developments: Monthly North American service center shipments of
total steel products continue to be down y/y (it has been the case since H2/21).
However, on a trailing three-month basis, the y/y rate of change has recently become
less negative. Meanwhile, service center inventory levels have recently tightened
and mill lead times have started to lengthen. We also see the recent strengthening
of oil & gas prices as positive for Russel's Energy Products segment outlook.
Raising our estimates: We have increased our RUS estimates (more so for 2022),
driven largely by our higher steel price forecast. Notably, our Q1/22 and FY2022
EBITDA estimates are ~14% and ~16% above consensus, respectively.
RUS underperformance: From a share-price perspective, Russel has notably
underperformed other North American steel distributor peers on average over
multiple time periods during the past year.
TD Investment Conclusion
Considering improved North American steel market dynamics, our above-consensus
estimates, RUS' notable recent underperformance, and the implied return to our
target price, we have upgraded our rating on Russel Metals to BUY.
Recommendation: BUY Prior: HOLD
Risk: HIGH
12-Month Target Price: C$40.00
12-Month Dividend (Est.): C$1.52
12-Month Total Return: 27.2%