Steel industry companies experienced an all-time high profitability in 2021, supported by rising product prices due to COVID-related supply shortages and strong demand conditions. Steel prices are starting to come down from their June peaks (HRC fell 21%, long steel fell 1%). However, falling iron ore prices and production cuts in China,
It will continue to support profitability figures that are expected to normalize in 2022. Despite the expectation of normalization in profitability in 2022, BIST steel companies still offer an attractive upside potential and dividend yield, and also offer protection from the depreciation of TL with their USD-based revenues.
Production cuts and falling net exports in China are the most important positive factors
China has the lion's share of 56% (2020) in total global steel consumption and is a net exporter. The Chinese government aims to keep crude steel production at 2020 levels in 2021 by aiming to improve air quality during the Winter Olympics. The first 8-month production figures point to an annual growth of 5.3%, which indicates a contraction in volumes in the remaining period. To meet its production target, China has canceled its 13% export duty rebate on HRC and Rebar from May 2021. China's October 2021 net steel exports mark an 8% year-on-year decline in volumes. Production and export cuts, which caused iron ore price-profit to drop from $209/tonne in June to $95/tonne in December, may continue to support steel price increases, largely offsetting the rise in coking coal prices. However, the Chinese construction industry and the potential slowdown in steel consumption and the slowdown in global growth due to new COVID variants are key risk factors for the global steel outlook.
Price Targets for both Erdemir and KardemirD have been revised upwards to reflect changes in our macro projections.
Kardemir (KRDMD.IS) continues to be on our Most Recommended Stocks list with a revised price target of 16.03 TL and currently offers a 53% increase potential. We reiterate our BUY recommendation for Erdemir with a 30% increase potential with the price target we have increased to 34.26 TL. Price target revisions were primarily driven by changes in our US$/TL estimates and assumptions of slightly higher discount rates. Our 2022 dividend projections point to 17% and 7% dividend yields for Ereğli and KardemirD, respectively.
Due to the slowdown in global economies (China and Europe) and/or new COVID variants, faster-than-expected normalization in steel prices and lower profit margins in and after 2022, additional export restrictions on Turkish steel, and finally, Turkey's Eurobond yields, which we use as the risk-free interest rate, are expected to be higher than expected. are also significant downside risks.
Ereğli (EREGL:IS) EBITDA per ton, which we calculated as 252 USD in our 2022 projections, indicates a 27% decrease from the record level of 347 USD in 2021, while the estimated average EBITDA per tonne (2023-2030) during the projection period is 173.
It is at USD level. The 2022E FD/EBITDA and P/E multipliers, which we calculated for Ereğli as 2.75x and 4.5x, respectively, point to a 25% and 5% discount compared to international peers.
KardemirD (KRDMD:IS) EBITDA per ton, which we calculated as 150 USD in our 2022 forecasts, indicates a 33% decrease from the record level of 225 USD in 2021, while the estimated average EBITDA per ton in the projection period (2023-2030) 102
It is at USD level. 2022E FD/EBITDA and P/E multipliers, which we calculated for Kardemir as 2x and 3.18x, respectively, point to a 46% and 32% discount compared to international peers.
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