Earnings Report /
Turkey

Erdemir: 3Q22 review – Better than expected results but not a great quarter overall

  • Erdemir realised a net income of TL2,565mn, 34% higher than both our estimate of TL1,914 and cons. of TL1,908mn.

  • The company realised an EBITDA/ton of US$139 in 3Q22, higher than our estimate of US$121 by 14.3%.

  • Recently, we removed Erdemir from our top picks due to uncertain outlook for steel sector for the following 2-3 quarters

Cemal Demirtas
Cemal Demirtas

Head of Research

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ATA Invest
31 October 2022
Published byATA Invest

Erdemir realised a net income of TL2,565mn, 34% higher than both our estimate of TL1,914 and cons. of TL1,908mn mainly due to higher than expected EBITDA.

The company realised an EBITDA/ton of US$139 in 3Q22, higher than our estimate of US$121 by 14.3%. Negative impact of higher than expected cash costs (+20.8%) and lower than expected sales volume (-4.0%) was surpassed by the positive impact of higher than expected average prices (+19.9%) and the company recorded EBITDA of TL5,733mn in 3Q22, 34.7% above both our estimate and consensus. 

We currently have a 12-mnth TP of TL37/shr, implying 36% upside potential, including 12.6% cash dividend. Following 3Q22 results, we do not need any revisions for now.

Erdemir’s sales volume declined by 9.6% y/y and 4.5% q/q to 1.88mn tons in 3Q22, 4% below our estimates. The share of export volume was down to 16.3% in 3Q22 from 22.7% in 3Q21 but up from 12.2% in 2Q22. 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. Production and sales volumes in 3Q22 were not very impressive. Thus, we need to further elaborate the details with management.

Erdemir realised EBITDA/ton of US$139 in 3Q22, higher than our estimate of US$121.  Higher than expected average prices were the major reason behind stronger than expected EBITDA margin. After a peak in March and April amid Russia-Ukraine conflict, steep decline in Turkey HRC prices followed the slump in global steel prices.  Amid ongoing uncertainties regarding global inflation and growth, Turkey HRC prices declined significantly to US$700/ton levels by September 2022 from record-high level of US$1,232/ton back in April 2022. Shift in deliveries from 2Q22 to 3Q22 with better pricing terms mitigated the negative impact of declining steel prices. We currently foresee that Turkey HRC prices will stabilize at c. US$700 in 4Q22 and Erdemir will realize EBITDA/ton of US$131 and US$241, respectively, in 4Q22 and full-year 2022.

Amid recession risk, steel outlook for 4Q22 and 2022 remains cloudy. Erdemir is still one of the healthiest steel players globally and less vulnerable compared to its global peers. Erdemir’s net debt increased to US$861mn in 3Q22 from US$732mn in 2Q22 mainly due to US$162mn Capex. We believe Erdemir will continue remain high dividend payer while continuing its investment plans.  Based on our 2022E estimates, Erdemir is currently trading 3.5x (US$ based), implying 22% discount to its historic 1-yr fwd EV/EBITDA multiple of 4.5x but trading at a premium compare to its global peers. Assuming that super-cycle has ended by 2Q22, we believe Erdemir’s EBITDA/ton is likely to stabilize at c. US$120-130 levels in 4Q22 and 2023E.  During 2013-2022 period, average EBITDA/ton for Erdemir was US$170 whereas lowest EBITDA of US$95 was realized in 2015 and highest EBITDA level of US$365 was realized back in 2021. We believe that downside risks are still higher for the following 2-3 quarters but recovery might come by 3Q23.