Erdemir: Strong EBITDA, TP up due to stronger steel

Erdemir has released strong 4Q21 IFRS results, with EBITDA almost 30% above consensus estimates. FCFE, however, was negative due to heavy working capital accumulation. We expect the company to declare
a generous FY21 dividend by the end of February, with a 21% annual yield. On the back of an upward revision of our steel price forecasts, and in anticipation of a weaker Turkish lira in 2022-23F, our EBITDA estimates grew some 20-40% for 2022-23F. As such, we increase our 12-mo Target Price to USD 3.4/sh (83% ETR): Buy reiterated.

Strong 4Q21 results and generous dividends are ahead. Erdemir reported strong 4Q21 results, with revenue and EBITDA staying 8-9% above our estimates and some 30% above the consensus. FCFE, however, was negative, and thus firmly below our forecasts due to a large working capital build-up vs. our expectations of release. However, management said that they expected a moderate WC release in 1Q22. The company is yet to report FY21 dividends (end of February). We expect Erdemir to declare USD 0.44/share, offering a 21% annual yield.
Turkish domestic demand remains robust. On the call, Erdemir’s management said that the company’s book of orders is already full for the next two months amid strong domestic steel demand. This supports our view that Turkish domestic HRC prices are to remain elevated in 1Q22.

Solid capex increase for 2022-2023F. Management guided for USD 550-600mn capex in 2022-23F. The additional expenses are for new projects in Erdemir’s pipeline. The guidance implies a capex increase of
some 40% YoY in 2022F. We have incorporated this into our model, which now stands 55% above our previous estimates for 2022-23F.

TP upgraded on higher steel prices. We have revised our Turkish steel prices forecast, which resulted in a 7% and 14% increase of Erdemir’s average realised price in 2022F and 2023F, respectively. Moreover, we now assume a continuing depreciation of the Turkish lira, with USDTRY 74-102% higher in 2022-23F than we had previously expected. As such, we have increased our EBITDA forecasts 19% and 37%, respectively. Due to the mostly dollar nature of the business and lira volatility, we now provide our 12-mo Target Price in dollar terms, which we have revised upwards to USD 3.4. As this implies an 83% ETR, we reiterate our Buy recommendation.


VTB Capital