Fixed Income Analysis /

CSN: Very strong Q2; reiterate Buy as top LatAm pick

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    1 August 2019
    Published by

    Companhía Siderúrgica Nacional (CSN – CSNABZ) reported a robust Q2, revised its guidance for the full year upwards and generally remained on a positive path, improving its operations and strengthening its balance sheet to levels that few thought possible little more than 18 months ago.

    We reiterate our Buy recommendation on CSNABZ’s family of bonds – our top pick in the region. There has been a significant rally in the company’s bonds over the past year, but we believe there is further upside. This might come from the delivery of the revised guidance, a possible positive rating action towards year-end and/or the achievement of management’s net leverage target of 3.5x by end-19. If, in addition, the company continues to sell non-core assets to pay down debt, this would be yet another catalyst for spreads to continue to tighten.

    During the Q2 conference call, management were very optimistic about CSN’s ability to continue to deliver strong performances in H2. Although they see steel as somewhat more challenging than CSN’s other businesses, they still expect strength in that sector, with additional volumes coming from the completion of upgrades at the company’s blast furnace and the Brazilian market catching up to international trends that are sustaining higher prices and volumes.

    However, it is likely that the main engine for continued growth will be the company’s mining operations, with high iron ore prices, increasing volumes, and strong domestic and international demand.

    Regarding the balance sheet, management stated that they will continue to explore ways of reducing the cost of capital, something that they expect to be a function of the continuing trend of lower rates globally and possible future capital market transactions. This, coupled with success on the year-end leverage target of 3.5x, should allow the company to further improve its cash-generation ability.

    In sum, although Q2 was very strong, the outlook seems even more promising.