Fixed Income Analysis /

CSN: Mediocre Q1, but better outlook; still top LatAm pick

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    13 May 2019
    Published by

    Companhía Siderúrgica Nacional CSN (CSNABZ) reported its Q1 results last week, showing a slight yoy improvement in net revenues, EBITDA and credit metrics. The company’s results could have been better were it not for exchange rate fluctuations, the higher costs of slab (affecting the steel segment) and the non-incurring financial expense derived from its most recent bond issue.

    Net revenues in Q1 were US$1.594bn, c2.1% higher than the US$1.562bn of the previous year; however, higher selling expenses, and the base effects of the high “other operating income” number in Q1 18 (inflated due to the sale of assets), resulted in operating income before financial results of US$313.6mn, compared with US$813.9mn in Q1 18. The “other operating income” figure in Q1 was US$554.2mn, compared with a loss of US$36mn in Q1.

    Despite this, EBITDA in Q1 19 was US$457.8mn, c19.5% higher than the US$383mn reported in the same period a year ago. CSN continued to show significant strength from its mining segment, which was a big contributor to the company’s positive performance in Q1 19.

    In terms of credit metrics, CSN ended Q1 with cash of US$888mn, short-term debt of US$1.381bn, total debt of US$7.219bn and a debt/EBITDA leverage ratio of 4.3x, lower than the 4.7x of end-18 and the 5.4x in Q1. The company’s extensions of maturities, tender offers for existing bonds and effective balance sheet management resulted in a lower cost of debt. However, CSN reported negative free cash flow for the first time in the past 12 months, at US$125.75mn, mainly as a result of a temporary increase in working capital in the steel and mining segments. The company stated that this will be reversed in coming quarters.

    On 10 April, the company’s subsidiary, CSN Resources, S.A., issued US$400mn in 7.625% senior unsecured bonds due 2023 and US$600mn in 7.625% senior unsecured bonds due 2026, both rated B2/NR/B-. The proceeds of these bonds will be used to tender for US$405mn of 2019 bonds and US$595mn of 2020 bonds. These transactions will be recorded in the Q2 results.

    We believe CSN will once again show significant improvement across all segments in Q2, given likely increases in sales volumes and prices in the steel and mining segments. In addition, we believe the yield that the CSN bond curve offers is still among the most attractive in the region and that spread compression will resume this quarter. Thus, we reiterate our Buy recommendation; CSN remains our top pick in the region.