The steel industry as a whole is not exciting for investors, and it is at this exact moment that opportunities to buy securities in this sector may appear. in a duel between Usiminas (USIM5) And the Gerdau (GGBR4)BTG Pactual has already picked a favourite.
The bank not only lowered the recommendation on Usiminas shares, but also lowered the target price – a change that the institution itself considered belated.
According to the update, BTG has moved from a buy recommendation to a neutral and has cut its target price for USIM5 shares from R$16 to R$11, which is a potential 15% upside compared to Friday’s close (Thursday 26).
The bank is recommending, in an environment where the entire sector is cheap, that investors build positions in Gerdau rather than Usiminas, as it expects the performance gap between the two to widen further.
At around 2:45 pm, Usiminas shares fell 4.15% to R$8.30, emerging in the block with the biggest losses in Ibovespa. On the other hand, Gerdau stock rose 0.13% at R$24.09. Check out our full coverage of the markets.
Why was Usiminas (USIM5) reduced?
Overall, BTG struggles to see how Usiminas shares will outperform in an environment of lacking relevant shareholder returns, limited operating visibility, increased overall risk, price discounts in Brazil and deteriorating earnings momentum.
“We feel a bit weird about downgrading a stock that is trading at 2.9 times Ebitda’s 2023 forecast, and agree that it’s a late move, because the market is already pessimistic about the company,” the bank says.
BTG now forecasts an Ebitda (EBITDA) of R$5 billion in 2022 and R$4.3 billion in 2023 – a 20% to 30% lower forecast.
The reduction includes higher raw material costs, discounts on steel prices in the domestic market, and lower profitability with more plate re-rolling in the overall mix.
The bank’s revised estimate is that Usiminas will trade at 2.9 times the 2023 Ebitda, generating a 12% below average cash return for shareholders.
The bank explains that the credit rating downgrade was done, primarily, due to operational risk and low visibility of results – “one of the lowest we’ve seen in years,” the bank says.
Usiminas (USIM5) setbacks
Usiminas (USIM5) should start renovation of blast furnace 3 in Ipatinga. According to BTG, the process should negatively impact margins, as the steelmaker needs to aggressively acquire panels from third parties to maintain deliveries.
On bank accounts, a maintenance stop can have a negative impact on Ebitda margin of 5-10 pips.
The market has already reacted to maintenance. Last Friday (29), Usiminas shares tumbled as a result of the renewal in Ipatinga.
“The company is also struggling with abnormal setbacks in its coke ovens, which are expected to consume an additional R$1.1 billion in capital expenditures and significantly reduce short-term profitability as the company ramps up purchases of coke in the market,” he says. .
It doesn’t stop there…
Capital allocation is another issue for the steelmaker, according to BTG.
Given the extent of future capital expenditures and short-term working capital needs, the bank believes that cash flow to shareholders will falter in the coming quarters.
BTG expects Usiminas’ lowest free cash flow return in the industry – roughly a 10% return for 2023 versus a return of around 20% for Gerdau (GGBR4).
In this scenario, the area for dividends and repurchases is relatively smaller, which is an important negative factor for future stock reclassification, according to the bank.
Although they maintain a more cautious view, BTG favorably evaluates factors that might surprise:
- Strong rebound in China’s flat steel prices, which are currently trading close to marginal production costs;
- Stop for less complicated maintenance of Ipatinga blast furnace refurbishment, with the help of low panel prices in the market;
- A sudden change in the company’s dividend policy, to which the bank attributes a very low probability.
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