Hikes - G&M RBC Dominion Securities analyst James McGarragle emphasized the valuations for Canadian steel companies Russel Metals Inc. (
) and
Stelco Holdings Inc. (
) are now below peers, which he thinks is “unwarranted” given “solid operational performance at both companies and similar end market demand drivers.”
“Stelco shares traded up 30 per cent quarter-to-date on the back of a recent surge in steel prices, in line with Cleveland Cliffs, but below U.S. Steel, which [Monday] saw its share price surge following an announcement it agreed to be acquired by Nippon Steel,” he said. “Russel shares traded up 16 per cent quarter-to-date, nicely outperforming the group average following its acquisition of seven Metal Service Centers from Samuel Son & Co., which we view positively.”
“Russel trades at a 12-per-cent discount to the group, below its trailing 10-year average premium of 10 per cent. Stelco is trading at 3.6 times NTM [next 12-month] consensus EV/EBITDA, versus blast furnace peers both above 6 times.”
In a research report previewing the companies’ fourth quarter, Mr. McGarragle cut his EBITDA expectation for Stelco to $56-million from $71-million, below the Street’s forecast of $61-million due tothe timing of expected coal pricing benefits. His full-year estimate slid to $489-million from $504-million, also under the consensus estimate of $492-million.
The analyst maintained his projections for Russel, including earnings per share of 74 cents, topping the consensus by 7 cents seeing a recent surge in prices benefitting results.
“We adjust higher our H1 estimates at both companies to reflect a recent surge in steel prices,” he added. “Moreover, we increased our 2024 and 2025 estimates at Russel to reflect the recent acquisition of seven service centers from Samuel, Son & Co.”
Maintaining “sector perform” recommendations for both companies’ shares, Mr. McGarragle raised his targets with Russel jumping to $47 from $42 and Stelco to $46 from $41. The averages are $45.44 and $47.93, respectively.
“We are leaving our Q4 steel price estimate unchanged at US$850 per ton which reflects weak pricing in the beginning of the quarter followed by a recent surge,” he said. “We expect prices to remain elevated into H1/24; however, we see prices moderating toward the back half of next year as imports increase to capture the current premium and domestic production picks up in the latter half of the year. Added to this are further headwinds from higher interest rates on construction activity and industrial production, which is evidenced in ABI and PMI indicators both trending below 50. Taken together, our 2024 steel price estimate increases marginally 2.9 per cent to US$900/st from US$875/st and trends down in H2/24, ending the year at US$800/st.”