Earnings Report /

Erdemir: Slightly better than expected results

  • Erdemir realised a net income of TL5,626mn, higher than our estimate of TL5,502mn in 1Q22

  • Considering strong 1Q22 results and current price-cost spread trends, we now see an upside risk to our 2022 estimates

  • We continue to keep EREGL in our TOP PICKS list

Cemal Demirtas
Cemal Demirtas

Head of Research

ATA Invest
28 April 2022
Published byATA Invest
  • Erdemir realised a net income of TL5,626mn, higher than our estimate of TL5,502mn and consensus of TL5,478mn mainly due to higher than expected EBITDA.

  • The company realised an EBITDA/ton of US$360 in 1Q22, beating our estimate of US$346 by 4.0%. Positive impact of higher than expected average prices (+2.1%) surpassed the negative impact of higher than expected cash cost/ton (+1.1%) and the company recorded EBITDA of TL9,907mn in 1Q22, 1.2% above our estimates and 7.3% above consensus. 

  • We currently have a 12-mnth TP of TL54/shr, implying 77% upside potential, including 20% cash dividend. Following the stronger than expected 1Q22 results, we will further review our estimates.

Erdemir’s sales volume declined by 1.5% y/y and 7.8% q/q to 1.98mn tons in 1Q22, falling 2.5% short of our estimates. The share of export volume was slightly up to 16.5% in 1Q22 from 10.6% in 1Q21 but down from 23.4% in 4Q21. 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. We expect a recovery in quarterly sales volume starting by 2Q22.

Erdemir realised EBITDA/ton of US$360 in 1Q22, higher than our estimate of US$346.  Higher than expected average prices were the major reason behind stronger than expected margins.  In our base scenario, we foresee a q/q recovery in EBITDA/ton in 2Q22E. After 1Q22 results and current trends of price-cost spreads, we believe our off-consensus estimates look achievable. We foresee EBITDA/ton of US$407 in 2022E on top of US$365 realised in 2021. Current HRC price and raw material prices still pose an upside risk. After falling to US$823 levels in mid-January, HRC Turkey prices jumped by c.US$472 to US$1,295mn as of 18 March 2022 and eased to US$1,225 as of last week. We do not see any major problem on the demand side in Turkey as well as Europe but we foresee HRC Turkey prices to normalize at around US$1,000 in 3Q22 though there is no major weakness yet.  Negative impact of rising coking coal and energy prices is likely to mitigate the positive impact of strong steel prices but margin improvement will be seen in 2Q22. Considering the cyclical nature of steel industry, we think that current margins are not sustainable in the long run and likely to normalize at a lower level.

Steel outlook for 2022 remains resilient and Erdemir is still one of the healthiest steel players not only in Turkey but also globally.  Erdemir’s turned into US$431mn net debt in 1Q22 from net cash of US$492mn 4Q21 due to US$1bn cash dividend outflow and US$167mn increase in NWC need. We believe Erdemir will continue remain high dividend payer while continuing its investment plans.  Based on our 2022E estimates, Erdemir is currently trading 2.7x, implying 44% discount to its historic EV/EBITDA multiple of 4.9x and 10% discount to its global peers.  Sudden drop in global steel prices is the downside risk to our estimates.