Erdemir
- 27.10.2010 09:55
Strong bottomline, surpassing both our and consensus estimate
Erdemir recorded TRL224mn net income in 3Q10, better than both our estimate of TRL138mn and consensus estimate of TRL115mn. Major reasons behind deviation from our estimates were slightly higher than expected EBITDA margin and higher than expected financial income due to its USD1.1bn net FX short position as TRL was strengthened against USD & Euro. On operational level, EBITDA margin of 21.5% was slightly higher than our estimate of 19.5% but far above the consensus estimate of 11.5%.
Lower than expected sales volume in 3Q… Inventories are rising…
Although QoQ decline in steel price remained around 3% versus our estimate of 7%, lower than expected sales volume of 1.4mn tons versus our estimate of 1.5mn tons led to lower than expected revenue of TRL1.5bn in 3Q10 versus our estimate of TRL1.6bn. On the back of weak domestic demand, we are cutting our 2010 sales volume estimate by 5% to 6.4mn tons for full-year 2010. On the other hand, we are inching up our estimate for domestic HRC price by 6% to USD625/ton in 4Q versus USD662/ton in 3Q. As a result, we are cutting our 2010 revenue estimate by 5% to TRL6.4mn.
EBITDA margin of 21.5% in 3Q10 is very impressive but not sustainable…
Despite strong margins in 3Q, we remain very cautious about rising inventories as sales volume of 4.5mn tons was realized in 9M10 versus production volume of 5mn tons during the same period. Considering year-to-date increase of 48% in inventories, stronger efforts to increase sales volume in 4Q would be crucial while sustaining profitability. So far in 4Q, we see that prices are weakening and there is no sign of strengthening yet. On the costs side, the picture is not any brighter in 4Q. Firstly, higher raw material cost will squeeze the margins in 4Q as it comes with a lag. Secondly, salary increase by 35% was reflected for only one month in 3Q but will again be fully in costs in 4Q. All in all, we expect 11.5% EBITDA margin in 4Q versus 23.7% EBITDA margin realized during the first 9 months.
MARKETPERFORM maintained, TP remained at TRL6.10, upside +13%
We believe that strong 3Q results have been mostly priced into the share price. Currently, Erdemir’s shares are trading at 9.2x 2010E EV/EBITDA multiple versus global peers’ average of 8.2x. For the time-being, we are maintaining our MARKETPERFORM rating and keeping our TP at TRL6.10 as we believe that downside and upside risks are more balanced now. We will further review our estimates and valuation after we receive further guidance from the management during the teleconference that would take place today in the afternoon.
