Event Summary of Investor Meetings
We hosted Russel Metals management for a series of virtual investor meetings.
Impact: NEUTRAL
On the whole, there was no material new information provided that would
cause us to change our views regarding Russel's overall outlook. Still, we
would characterize the overall tone of the meetings as constructive.
Russel highlighted the continued positive momentum of steel prices in Q3/21
(benchmark U.S. HRC price currently at US$1,902/t, +313% y/y and +9%
QTD). Management noted seeing continued broad-based demand strength,
both regionally (U.S. and Canada) and across key end-markets served.
Notwithstanding elevated steel prices, RUS has observed very little evidence of
demand destruction at recent price levels.
Management discussed its strategy of continuing to increase the amount of valueadded processing done through the company's Metals Service Centers segment.
Russel aims to bring the total amount of Service Centers volume that
undergoes high-end value-added processing up to ~50% (vs. ~30% today)
over the next 3-4 years. Overall, this initiative is expected to benefit segment
gross margins by 200–300 bps (inclusive of gains realized in recent years, which
are seen as being less than 100 bps). Regarding Energy Products, the segment
has been transformed (volatile and low-margin OCTG/line pipe business now
nearly fully exited). Going forward, the Energy Products segment (primarily
field stores) is expected to generate quarterly revenue of $150mm–$200mm,
with gross margins slightly above 20%.
Russel has a very healthy balance sheet (essentially net-debt neutral), affording
management considerable flexibility. Acquisitions remain a focus and Russel
noted a strong pipeline of potential opportunities (primary interest is in
expanding RUS' Service Centers footprint in the U.S.).
TD Investment Conclusion
We expect Russel's results to continue benefiting from strong steel prices and
healthy steel demand. Further, we view recent energy sector improvements
as encouraging. We see RUS' 4.2% dividend yield and valuation as attractive
(particularly when one considers the Energy Products segment's transformation and
margin upside potential from increased value-added processing).
Recommendation: BUY
Risk: HIGH
12-Month Target Price: C$40.00
12-Month Dividend (Est.): C$1.52
12-Month Total Return: 15.7%