Earnings Report /
Turkey

Erdemir: 3Q21 review – Upward revisions are likely after strong results

  • Erdemir realised a net income of TL5,003mn, higher than our estimate of TL4,757mn mainly due to higher EBITDA.

  • We continue to keep EREGL  in our Top Picks list.

  • Considering strong 3Q21 results and  price-cost spread trends, we now see an upside risk to our  4Q21 and 2022 estimates

Cemal Demirtas
Cemal Demirtas

Head of Research

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ATA Invest
27 October 2021
Published byATA Invest

Erdemir realised a net income of TL5,003mn, higher than consensus of TL4,647mn and our estimate of TL4,757mn mainly due to higher than expected EBITDA.

The company realised an EBITDA/ton of US$419 in 3Q21, beating our estimate of US$409 by 2.5%. Positive impact of higher than expected average prices (+2.4%) surpassed the negative impact of higher than expected cash cost/ton (2.3%) and the company recorded EBITDA of TL7,730mn in 3Q21, 4.4% above our estimates and 6.7% above consensus. 

We currently have a 12-mnth TP of TL27/shr, implying 49% upside potential, including 13% cash dividend. Following the stronger than expected 3Q21 results, we will further review our estimates. 

In line with our estimate of 2.123mn tons, Erdemir’s sales volume declined by 4.6% y/y but up 5.6% q/q to 2.124mn tons in 3Q21. We expect sales volume to be at 2.155mn tons in 4Q21 and end up the year at 8.3mn tons, implying 2.3% decline in 2021.  The share of export volume was slightly up to 22.2% in 3Q21 from 16.4% in 3Q20 and 20.2% in 2Q21. Considering the demand-supply dynamics, Erdemir is likely to focus on meeting local demand as it was the case in the past.

Erdemir realised EBITDA/ton of US$419 in 3Q21, higher than our estimate of US$409.  Higher than expected average prices were the major reason behind stronger than expected margins.  In our base scenario, we were assuming EBITDA/ton of US$327 in 4Q21E. After 3Q21 results and lagging impact of price-cost spreads, we foresee an upside risk to our EBITDA/ton estimates. Recall that we foresee EBITDA/ton of US$337 in 2021E and US$206 in 2022E. Current HRC price and raw material prices still pose an upside risk. After falling to US$850 levels 2 weeks ago, HRC Turkey prices rebounded by c.US$75 to US$915mn as of last week. We do not see any major problem on the demand side in Turkey as well as Europe. Negative impact of rising coking coal is likely to be mitigated by lower iron ore costs. Considering the cyclical nature of steel industry, we do not think that current margins are not sustainable in the long run and likely to normalize at a lower level.

Despite pandemic concerns, still one of the healthiest steel players not only in Turkey but also globally.  Despite strong profitability, Erdemir’s net cash increased to US$209mn in 3Q21 from US$111mn 3Q21 due to rising NWC needs. On the back of rising product prices and raw material costs. Erdemir’s net working capital needs increased by US$453mn q/q to US$2.3bn mainly due to rising inventories and trade receivables. We believe Erdemir will continue remain high dividend payer while continuing its investment plans.  Based on 2021E & 2022E estimates, Erdemir is currently trading 2.7x and 4.3x, implying 44% and 18% discount to its historic EV/EBITDA multiple of 4.9x.  We believe that normalization in both steel prices are raw material prices will possibly take place by mid-2022.  Considering the more resilient outlook for 4Q21E, our latest estimates pose an upside risk.  Sudden drop in global steel prices is the downside risk to our estimates.