Scotiabank note on Share repurchase incl financial models
Repurchasing another Chunk of its S/O
OUR TAKE: Positive. Stelco announced the results of the SIB (initiated on December 21). Based on the preliminary results, the company repurchased 4.44 million shares at a price of $37/share for a purchase price of $164.3 million. Recall, in the SIB, Stelco offered to purchase up to $250 million worth of shares ranging from $31/share to $37/share by way of a modified Dutch auction. Interestingly, the SIB was only 66% filled, despite the shares trading below $37/ share for the last nine trading days.
Since August 2021, Stelco repurchased 15.8 million shares (average price of $35.51), which represents 18% of the shares outstanding at the time. We forecast a net cash position (inclusive of pension liabilities) of approximately $275 million by the end of 1Q22, which is forecast to grow to nearly $900 by the end of 2022. As such, we expect the company to continue to explore ways to accretively deploy capital, including additional share repurchases.
We estimate the company will generate FCF of $905 million (or approximately $12.50/share) in 2022. Following the SIB, we estimate Stelco will have a cash balance of approximately $720 million as at 1Q22.
So far this year, North American HRC prices have fallen quite precipitously (in line with our expectations). Generally, we expect North American steel to continue to fall closer towards global prices (in the next couple of months) as supply ramps and inventories increase in the region. North American HRC prices peaked in October 2021 (at approximately US$1,900/nt) and have declined nearly 40% since (to approximately US$1,200/nt). We forecast a decline to US$1,000/nt by the end of 1Q22, before we expect it to find some support in the US$800/nt to US$1,000/nt range for the balance of the 2022. We would view a stabilization of HRC prices near US$1,000/nt as a near-term positive for the shares. We have made modest revisions to our estimates.
| Exhibit 1 - Financial Forecast Summary (in C$ million, unless noted otherwise) |
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| Source: Company reports; Scotiabank GBM estimates. |
Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.
| Qtly Adj EBITDA (M) | Q1 | Q2 | Q3 | Q4 | Year | Current EV/Adj EBITDA |
| 2020A | $20 | $34 | $-39 | $60 | $75 | 32.7x |
| 2021E | $185A | $410A | $787A | $701 | $2,090 | 1.2x |
| 2022E | $468 | $317 | $300 | $249 | $1,335 | 1.8x |
| 2023E | $155 | $155 | $151 | |