(EREGL, ISDMR, KRDMD)
We believe that anticipated strong 4Q18 results that would benefit from the lagging impact of product prices on P&L and attractive dividend yield expectations would act as a short term trigger for the Turkish steel stocks. However, the market would continue to be vulnerable until some concrete signs of progress on trade dispute between US and China emerge and further stimulus measures in China come into play. Even though we find the valuations non-demanding, we believe it is early to bet on a permanent repricing in the Turkish steel players’ stocks, considering disappointing outlook for steel using industries in China and continued limited demand in the domestic market.
Revising down our TPs
We downgrade our target price for steel producers in our coverage following a change in our valuation methodology. We incorporate multiple comparison methodology to calculate fair values for EREGL, ISDMR and KRDMD, as we believe it reflects better the current negative pricing in global steel sector peers. Our revised valuation indicates a 12-month TP of TL9.30/s for EREGL, implying 22% upside potential to the current price. We reach 12-month TP of TL7.20/s for ISDMR and TL2.70/s for KRDMD, accordingly, indicating 16% upside potential for both. We prefer Erdemir among our steel sector coverage due to its more defensive nature, operating in supply shortage of HRC domestic market and strong export capabilities.
Sharp squeeze in profitability in 1H19
We incorporate only a mild improvement in steel prices in 2H19, after seeing the lowest prices in 1Q19, while the lagging impact of product prices is likely to hit the steel producer’s profitability throughout 1H19. In 1Q19, our reference steel mill spread indices indicate ~$102/ton EBITDA contraction y/y in average for the steel producer in our coverage. We foresee a respective $119/ton, $105/ton and $69/ton EBITDA per ton for Erdemir, Isdemir and Kardemir indicating 46%, 50% and 58% y/y contractions in EBITDA/ton performances in 2019.
Kardemir is expected to be the worst performer in the short-term
Kardemir’s EBITDA is expected to decline by 66% y/y to TL283mn in 1H19, highest decline in our coverage amid change in product mix on behalf of semi-finished products, and lower sales volume given the expected weakness in domestic construction sector coupled with 2-months maintenance shutdown in 4th blast furnace. On the other hand, any decision for country based quota from EU is the key downside risk for our estimates for Erdemir and Isdemir as exports to EU constituted ~14% of the Group’s sales volume.
Attractive dividend yields from EREGL and ISDMR
We foresee a respective TL1.14/s, TL1.24/s and TL0.13/s DPS from EREGL, ISDMR and KRDMD with respect to 2018 results indicating 15%, 20% and 6% dividend yield.
Excerpt from OYAK Invest Research Report