Equity Analysis /
Turkey

Erdemir: Downward risks are mounting at current valuations

  • We are revising down our 2022E and 2023E net income estimates by 8.8% and 44.3%, respectively, to TL16.6bn and TL8.0bn.

  • Considering the risk-reward balance at current val., we are downgrading Erdemir to “Marketperform” from “Outperform”

  • Maintaining our 12-mnth TP at TL37.00, implying 11% upside potential including a cash dividend yield of 10%.

Cemal Demirtas
Cemal Demirtas

Head of Research

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ATA Invest
8 November 2022
Published byATA Invest

We are revising down our 2022E and 2023E net income estimates by 8.8% and 44.3%, respectively, to TL16.6bn and TL8.0bn. Our off-consensus net income estimates for 2022 and 2023 now stand at 14.1% and 43.6% below the Bloomberg consensus.

Considering the pressure on steel prices and resilient energy costs amid slowdown in global steel sector, we revised down our 2023E EBITDA/ton estimates by 28.4% to US$97, 60% below US$247 in 2022E and 73% below record-high of US$365 in 2021.

Considering the risk-reward balance at current valuation, we are downgrading Erdemir to “Marketperform” from “Outperform”.

Maintaining our 12-mnth TP at TL37.00, implying 11% upside potential including a cash dividend yield of 10%.

We believe that downtrend from super-cycle has started by 2Q22 while HRC prices declined to U$665/ton in Nov 22 after peaking at US$1,250/ton levels back in Feb 22. World steel outlook still looks cloudy. According to World Steel Outlook Oct 22 report, global steel demand is expected to decline by 2.3% in 2022E followed by 1% growth in 2023E. We believe demand in China and exports into other regions will be the key determinants of global steel prices. Idling of many blast furnaces in Europe is also signalling that demand outlook in Europe will also be negative. Considering the current price-cash cost spreads and pressure on global prices, in our base scenario, we believe that Erdemir’s EBITDA/ton will decline to US$105 in 4Q22E from US$139 in 3Q22 and US$356 in 2Q22. We believe that EBITDA/ton will further decline to US$97 in 2023E, assuming that average HRC prices will be at around US$750/ton, implying 11% increase from current HRC Turkey price of US$665/ton.

Rather than raw material increases, further decline in steel prices could be the major risk

Considering the Russia-Ukraine conflict and weak demand in China, we do not expect significant recovery in prices for the foreseeable future. Recent iron ore investment announcement is long-term positive but is not embedded into our valuation due to uncertainties in details.