european-steel-manufacturer-ssab-looking-to-rebound

European Steel Manufacturer SSAB Looking To Rebound

Thesis

Despite a slowdown in the European economy, the future looks bright for Swedish company SSAB (OTC:SSAAF).

Having been hit hard during late 2018 after the Trump administrations steel tariffs, the stock is set to rebound.

Having had a hard time for the last five years and total losses during these five years of $600 million resulted in the need for a primary offering of $500 million. After that inflow of cash, many things have changed in the right direction.

Company overview

SSAB is a specialized steel manufacturer with its core products of high-quality steel products that are hard to copy for the otherwise fierce Chinese competition.

The company enjoys support in its home territory in Sweden from the Swedish government in the form of less tax on electricity. Stable electricity production from hydro power, and nuclear power helps to give SSAB an edge when it comes to producing steel of high quality and in need of very high heat.

Projected turnover for 2019 is about $76 billion with a projected P/E of 8.7.

Operating profit is projected to be stable at about $5 billion during 2019, 2020 and 2021.

A turnaround in the making

After the inflow of $500 million in cash from investors, some notable events have happened.

  1. The steel export from China, largely because of the overcapacity from Chinese steel producers, has abated and prices have stabilized - one of the reasons being tariffs imposed by Donald Trump.
  2. SSAB started a deliberate switch in production towards high-durability steel products and other premium steel products with better margins and less vulnerability to market swings.
  3. The focus on increasing cost efficiency has, along with the previous two points, created a strong cash flow, and SSAB today has a much stronger balance sheet than previously, with a debt-to-equity ratio of 14% by the end of 2018.

The previous year saw primarily strong development in the American market, where SSAB sells plate to sectors like the energy, construction and the mining industry.

Over 90% of the products is being made locally in Alabama and Iowa, which means SSAB is actually helped by the tariffs by way of reduced imports and increasing prices. On top of that, the demand from end customers been strong, and last year EBITDA increased to $250 million from $80 million in 2017.

SSAB from yahoo.finance

Source Yahoo finance. Currency in SEK

Market expert predicts good demand also for 2019.

Special steels

Also, the business area special steels have a bright future, being the second-largest business for SSAB. Turnover increased by 17% in 2018 with support from both higher volumes and increasing prices. The customers are from sectors such as heavy transports and construction machinery - sectors largely driven by a demand to increase material and energy efficiency with potential in developing countries in Asia, Latin America and Africa.

The goal for 2020 is to deliver 1,35 million tons (1350 million kilograms) high-strength steel. During 2018, the company delivered 1.3 million, compared to 1 million in 2016.

Europe

The largest business area for SSAB is Europe, which consisted of half its operating profits last year, but the outlook for Europe is mixed. After a strong start in 2018, demand decreased at the end of 2018, and with a relatively big portion of sales to European car manufacturers, the outlook doesn't look too bright.

Management has shown the ability of being able to deliver on the goals set for 2020. The goal is to make the product mix consist of 40% premium products by 2020. During 2018 it was 36% and during 2016 it was 30%.

The main goal for the American market is to reach a market share of 30% for rough sheet in 2020. In 2018, the market share was 28%.

Financials

There is already a relatively severe downturn in the European market priced in at a P/E of 8.5 both for 2019 and 2020, while EV/sales is at a historic low of 0.5.

The dividend is at attractive levels of 4.78%.

Small Danish steel manufacturer bought

SSAB bought Danish steel manufacturer "Sanistål" with revenues of $190 million last year. The acquisition has been a tactical one, since SSAB didn't have a presence in the country before. With a big market share already in the neighboring country of Sweden, it makes perfect sense to develop and focus on Denmark. Mikael Nyquist, president of Tibnor, SSAB's subsidiary, had this to say:

We see good potential for synergy effects and the product mix complete each other.

Sanistål is being bought for $63 million and is being projected to contribute to cash flow and profits immediately.

Summary

Given the low valuations in EV/sales and low P/E, it appears that a significant decline in SSAB's future sales is already priced in.

If one does not believe in a significantly worse steel market or a new flood of Chinese exports, it is hard not to see an attractive valuation.

The acquisition of Sanistål for what seems to be a good price in a logical country to expand in shows the skill of management in making good deals.

I believe the coming years will not be as bad as what is already priced into the stock.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SSAAF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.