Erdemir realised a net income of TL6,639mn, 1.5% lower than both our estimate and consensus of TL6,743mn mainly due to slightly lower than expected EBITDA.
The company realised an EBITDA/ton of US$356 in 2Q22, slightly short of our estimate of US$365 by 2.5%. Negative impact of higher than expected cash costs (+2.7%) surpassed the positive impact of higher than expected average prices (+1.0%) and sales volume(0.4%) and the company recorded EBITDA of TL11,022mn in 2Q22, 2.3% below our estimate but 3% above consensus.
We currently have a 12-mnth TP of TL42/shr, implying 65% upside potential, including 15% cash dividend. Following solid 2Q22 results, do not need any revisions for now.
Erdemir’s sales volume declined by 2.4% y/y and 0.9% q/q to 1.96mn tons in 2Q22, 0.4% above our estimates. The share of export volume was down to 12.2% in 2Q22 from 20.1% in 2Q21 but down from 16.2% in 1Q22. Considering the demand-supply dynamics, Erdemir is likely to focus on meeting local demand as it was the case in the past while chasing opportunities in exports. We expect a recovery in quarterly sales volume starting by 3Q22.
Erdemir realised EBITDA/ton of US$356 in 2Q22, slightly lower than our estimate of US$365. Higher than expected cash costs were the major reason behind slightly weaker than expected margins. Amid ongoing uncertainties regarding global inflation and growth, Turkey HRC prices declined significantly to US$675/ton levels in August 2022 from record-high level of US$1,232/ton back in April 2022. After a peak in March and April amid Russia-Ukraine conflict, steep decline in Turkey HRC prices followed the slump in global steel prices. Accordingly, we revised down our 2022 and 2023 estimates back in July. We now foresee a q/q decline in EBITDA/ton in 3Q22E. We believe that sales volume will increase q/q in 3Q22 since some deliveries shifted to 3Q22 from 2Q22. Shift in deliveries with better pricing terms are likely to mitigate the negative impact of declining steel prices that are likely to stabilize after recent decline. Following a strong 2Q22 and 1H22, we expect EBITDA/ton to decline to US$158 in 3Q22 from US$356 in 2Q22 and US$360 in 1Q22. We expect a rebound in EBITDA/ton to US$184 in 4Q22E and full-year EBITDA/ton to reach US$263 in full-year 2022E. Reflecting the lower prices to our price and cost estimates, we currently foresee an average EBITDA/ton of US$160 in 2023E on top of US$263 in 2022E.
Steel outlook for 2022 remains resilient and Erdemir is still one of the healthiest steel players not only in Turkey but also globally. Erdemir’s net debt increased to US$789mn in 2Q22 from US$431mn in 1Q22 due to US$133mn Capex and US$476mn increase in NWC needs. We believe Erdemir will continue remain high dividend payer while continuing its investment plans. Based on our 2022E estimates, Erdemir is currently trading 2.9x (US$ based), implying 35% discount to its historic 1-yr fwd EV/EBITDA multiple of 4.5x. After recent decline in steel prices during March-July, further deterioration in global steel prices is the downside risk to our estimates.