Adjusted Targets and Ratings A "sound strategy and outstanding execution is paying off” for Russel Metals Inc. (RUS-T), according to National Bank Financial analyst Maxim Sytchev, who sees it poised to benefit from positive sentiment in the U.S. steel market.
“Despite a volatile pricing backdrop, management remains steadfast in its strategy of lifting and de-risking the company’s earnings profile through investment in ‘stickier’ and higher-margin revenues from value-added offerings – which has organically driven incremental market share gains,” he said.
“Implementing improved inventory management practices and rationalizing the footprint of Samuel assets will help close a significant portion of the margin gap to legacy RUS operations which, combined with an expected bottoming in sheet pricing, should result in solid operating leverage for 2025E. Despite the recent share price rally, we continue to see substantial value and expect shares to continue moving higher; investors should heed Reliance Inc. (NYSE: RS; Not Rated) share price movement of 12 per cent [Wednesday] as an excellent indicator around improved U.S. steel sentiment; recall that RUS has 40-per-cent exposure to the U.S..”
Shares of the Mississauga-based metals distribution and processing company jumped 4.7 per cent on Thursday after it reported revenue for its third quarter of $1.089-billion, down 2 per cent year-over-year and in line with the consensus forecast of $1.108-billion. Headline EBITDA on a post-IFRS 16 basis was $67.4-million, a drop of 29 per cent but ahead of the Street’s view of $64.7-million, while adjusted earnings per share slid 40 per cent to 59 cents but matched analysts’ expectations.
Mr. Sytchev thinks the company’s end markets showed resilience despite a “sustained pricing downdraft,” which he thinks should improve in 2025.
“We moderated our margin assumptions slightly to reflect the dilutive impact of Samuel assets (fine-tuned operating and SG&A expenses) and the expected cadence of synergy realization; in addition, we are factoring in higher resulting lease and depreciation expenses going forward. Furthermore, we have built-in the Q4/24E redemption of the remaining 5.75-per-cent notes as the company has simplified its capital structure by retiring legacy high-yield debt in favour of a $600 million bank facility,” he said.
Reiterating an “outperform” rating, Mr. Sytchev raised his target by $2 to $49. The average is $47.67.
Elsewhere, other changes include:
* RBC’s James McGarragle to $45 from $43 with a “sector perform” rating.
“RUS [Wednesday] night reported Q3 results, which we viewed as a positive in the context of a tough operating environment,” he said. “Into Q4 and early 2025, we expect a lower steel price backdrop and a weaker industrial environment to weigh on results versus current consensus expectations. However, we believe this is already built into sentiment and see investors looking past near-term weakness into an inflection in steel prices next year, in addition to upside from the Samuel acquisition. We however remain cautious on the outlook into next year and maintain Sector Perform.”
* Raymond James’ Frederic Bastien to $50 from $48 with an “outperform” rating.
“We maintain our constructive view on Russel Metals after the steel distributor’s 3Q24 results landed on the right side of consensus [Thursday]. There is newfound enthusiasm for the North American steel market in the wake of Donald Trump’s victory in Tuesday’s presidential election, but we remind investors that RUS put in the hard work to improve the business when others weren’t watching. Whether it be exiting low-return cyclical businesses, investing in value-added businesses and equipment upgrades, or using buybacks opportunistically, Russel has structurally and sustainably improved its business model. All of this leaves us to conclude a valuation of 6.6 times forward EBITDA is far too punitive for this high-quality name, especially with the explosive run-up in the shares of industry peers such as Reliance Steel,” said Mr. Bastien.
* Stifel’s Ian Gillies to $53 from $52 with a “buy” rating