TSX:STLC - Post Discussion
Post by
retiredcf on Apr 13, 2021 9:03am
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Their upside scenario target is also raised to $44.00. GLTA
Stelco Holdings Inc.
Steel outlook remains positive, raising our target
on stronger pricing
Our view: We have updated our model incorporating revised consensus steel estimates and expect Stelco to generate strong free cash flow and earnings as the company benefits from its highly fixed cost structure in the current and forecast steel price environment. We expect Stelco to look to increase capital returns to shareholders after significant investments in its facilities over the past several years. Our Price Target increases to $34 from $29 and we maintain our Outperform rating.
Key points:
Steel market remains tight, orders being placed into June: North American HRC price remains near all-time-highs as demand continues to be strong and supply remains tight. US capability utilization is below 2019 levels (77.9% last week vs. an average of 80.7% in 2019) and service centers remain hesitant to turn to imports given the long lead times and risk around a price correction. Platts has noted that lead times for HRC remain extended at 9 weeks, above the average of 4 weeks over the past decade and Stelco has noted a lag of ~3-months between orders and deliveries. As a result we expect Stelco's realized pricing to remain strong through Q2 and Q3 as higher HRC prices flow through to the company's sales.
Benefiting from fixed cost structure: In the current steel price environment Stelco is set to benefit from its highly fixed cost structure. We expect some increase in operating costs with heightened scrap prices, however compared to EAF producers (~2/3rds of US production), Stelco utilizes significantly less scrap in its production process, and the company has a long term fixed purchase agreement for iron ore pellets (subject to adjustments for certain cost factors). We estimate the company will generate $315M in FCF in 2021 (12% yield), $370M in 2022 (14% yield) and $307M in 2023 (12% yield) and to look to return capital to shareholders in the form of special dividends or via buybacks.
Attractive valuation, increasing target: Our price target goes to $34 from $29 on improved earnings from higher steel prices. Our target is based on a 6.5x multiple of 2022E EBITDA, inline with Stelco's historical average and the average of US peers. The shares are currently trading at 5.8x 2022E EBITDA vs. peers at 8.2x. Our steel price estimate increased to U$927/st in 2021 from U$851/st and to U$739/st in 2022 from U$695/st (see page 3).
Q1/21 preview: We expect a strong operating quarter as Stelco realizes the benefits from its blast furnace reline completed in Q4/20. We revised our operating costs upwards on higher scrap steel prices and lowered our realized price for Q1 slightly as we expect the lag in pricing to be more pronounced than initially expected. Our Q1 EBITDA estimate decreased to $195M from $221M, and our overall 2021 EBITDA forecast increased to $850M from $797M as Stelco should realize higher prices in Q2 and Q3 (see page 4 for more details)
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