New Coverage Stelco Holdings Inc. is poised to benefit from ongoing cost reduction initiatives and “strong” fundamentals in the North American steel industry, according to Stifel analyst Anoop Prihar.
Seeing it “well positioned to compete,” he initiated coverage with a “buy” recommendation on Wednesday.
Mr. Prihar is projecting 2021 adjusted EBITDA of $1.614-billion in 2021, up from $75-million, benefitting from improved prices, costs and production.
“Our STLC investment thesis is three-fold: 1) The North American macro-environment will continue to support robust steel prices,” he said. “The economic stimulus programs implemented in Canada and the US are having the desired effects, with increased economic activity seen in the automotive and construction sectors. This, along with ongoing trade tariffs in the U.S. and the prospect of a Biden infrastructure plan, are expected to support steel prices. 2) The strength in steel prices will likely be aided by the demand for scrap. With approximately 70 per cent of U.S. steel being produced using EAF’s and with scrap metal expected to account for upward of 70-75 per cent of an EAF’s operating cost, the ongoing strength in scrap prices is expected to support higher steel prices. 3) STLC management is focused on lowering cost and optimizing production. Through a series of initiatives, STLC management expects to generate approximately $48 per ton of permanent cost savings, a significant portion of which has already been realized. STLC has also expanded its product offering to include higher value ‘fully-processed’ cold roll steel and pig iron. The company has also secured supply contracts for iron ore and metallurgical coal (which are expected to account for more than 50 per cent of input cost) that provide long term access to these materials at competitive rates.”
He set a Street-high target for Stelco shares of $48, implying a 42.8-per-cent total potential return. The average is $41.86.