ANIOY - Acerinox: Strong Results Don't Obscure Macro Headwinds

2023-03-12 01:49:17 ET

Summary

• Acerinox is a Spanish stainless steel producer with a global presence and 50% of revenues derived in North America.
• The company recently integrated VDM to provide strength in specialty alloys.
• FY 2022 was a record year marked by a progressive slowing in the second half.
• US macro-headwinds are likely to augur weaker results for the steel maker in 2023.

Company Introduction

Acerinox ( ANIOY ) is a Spanish stainless-steel producer which manufactures and markets stainless steel products in Spain, the Americas, Africa, and Asia. It has a wide range of products including cold rolled, hot rolled and black rolled coils.

Its global footprint has transformed it into one of the most competitive producers of stainless steels and nickel alloys. Since its foundation in 1970, the company has invested significant sums in developing best in class practices to bring steel products to market in the most cost-effective way.

The company boasts significant production firepower – 3 fully integrated flat product manufacturing facilities: Campo de Gibraltar (Spain 1970), North American Stainless (Kentucky, 1990) and Columbus Stainless (South Africa, 2002).

Additionally, the company has made targeted investments with a manufacturing complex, Bahru Stainless, in Johor, Malaysia in 2008. It’s the number one stainless steel maker in the United States with 31% market share and 50% of sales derived from the region.

2022 has been a rockstar year for Acerinox – record sales, a prized strategic acquisition and a bolstering of production have all figured in the company yearbook.

The company has also been selectively pursuing strategic investments such as the purchase of German steel specialist, VDM metals, allowing it to bolster its position in special nickel alloys and high-performance steels. With this acquisition, Acerinox has managed to add an additional 4 manufacturing sites, including 2 in the United States. The company has a well developed commercial, marketing and distribution network with offices in 31 countries, 18 services centers and 25 warehouses globally.

Acerinox’s organizational line-up includes assets in both stainless steel and high performance alloy production.

Acerinox is a capital-intensive business with fluctuating cost inputs from raw materials. Operating leverage for these kinds of businesses is high given economies of scale driven from its large-scale manufacturing footprint.

In summary, the company manufactures high volume low margin steel products dedicated to downstream industrial customers. Accordingly, the firm’s success provides a plausible barometer for the health of global industry.

Production has been on the up, with the melting shop making meaningful increases in output (2.23Mt FY 2019 v 2.61Mt) over the past 3 years. Sales and profits have followed – Acerinox posted 6.7B€ FY 2021 and 8.7B€ FY 2022. The 2.49B€ Spanish stainless steel player trades a 7.6x forward and derives turnover from the Americas (49%), Europe (37.5%), Asia (8.1%), Africa (5.2%) and Oceania (0.2%).

The company’s 7.6x forward PE ratio is at one of the lowest points it has ever been.

Despite the growth in revenues, sustained cash flows, and rock bottom valuation, our outlook on the firm remains neutral. Industries like steel manufacturing often lag global industry and with a recession likely in the United States in H2, 2023, it is difficult to identify sizable risk adjusted returns.

The 16 analysts following the firm are perhaps more hawkish with 2 x strong buy ratings, 10 x buy ratings, 3 x hold ratings and 1 x sell rating. Acerinox derives ~50% of revenues from the United States. If the economy ultimately folds under months of yield curve inversion and a widening of credit spreads, it is likely that this is felt directly on the Spanish firm’s top and bottom line.

Product Portfolio & Operations

Stainless steel products, generally chromium-containing alloys, play a critical role in the manufacturing of components for automotive, consumer durables, construction, aerospace, electronics, medical, defense, and oil & gas industries.

That breadth of diversified customer base does provide some de-risking during an industry specific downturn. The chrome oxide layer on the metal provides the products resistance to corrosion. Process transformation follows a range of product dependent steps including melting, remelting, forging, rolling, peeling, grinding, turning, and drawing to produce stainless steel coils with varying technical characteristics.

Hot rolling process transformation step.

Acerinox is focusing strategically on building additional capacity into its North American operations. Focus will be on higher value-added flat products such as bright annealing, thin gauges, and steels with special compositions.

To achieve this, the company intends to spend almost $250M to commission a new cold rolling mill, roll grinders, and upgrade annealing and pickling lines. A melt shop building will also be set up. These investments are geared to maintaining Acerinox’s US market leader position while increasing capacity by an additional 20%.

The product line up is derived of mature high-volume stainless-steel products and more exotic high-performance alloys used in advanced sectors such as aerospace and petro-chemicals.

Synergies are expected to be delivered with the VDM takeover. 13 new finished products and an additional 9 different alloys now find their way into Acerinox’s global product catalogue and the development of a joint commercial strategy with VDM will provide additional revenue generating opportunities. Leveraging of both companies’ purchasing power is expected to deliver meaningful savings and organizational efficiencies.

Financials

2022 was a bit of a mixed bag for the Spanish metals’ producer. The first half of 2022 saw a favorable market environment allowing for record sales (8.7B€). This was followed by dampened market sentiment in the second half, leading to destocking and inventory write-downs (98M€).

In the United States, flat products output showed little growth and imports out of the United States plunged 40% on the back of US dollar strength and a progressively deteriorating market environment. US inventories remain in balance and expectations remain high that the US production unit will benefit from the Inflation Reduction Act with focus on the domestic economy.

The European market faces more pressing challenges. Flat products have rolled over (no pun intended) as inventories of finished goods start to accumulate. Prices have come under pressure due to an increasingly subdued market environment.

Stainless steels represent the lion’s share of Acerinox’s topline. In FY 2022, they accounted for 7.4B€ of sales for an EBITDA margin of 16%. For the stainless steels division, 2022 heralded record sales, the highest EBITDA ever and strong operating cash flow (648M€). These results were blemished by a sizable inventory adjustment (-67M€) and a 204M€ impairment on Bahru Stainless, the Spanish firm’s Southeast Asian stainless steel manufacturing hub.

The High-performance alloys business unit is Acerinox's specialty steels division. It posted record production with 82kt translating into sales of 1.3B€. EBITDA tipped in a 125M€ (10%), marginally lower than the 16% posted by the stainless steels division. A -31M€ inventory adjustment figured for the high-performance alloys division also.

Acerinox sales volumes started to markedly decline during the second half of 2022.

The second half of the year showed a worrying decline in both sales volumes and margins, perhaps auguring future struggles the Spanish steels specialist may face in 2023.

Sales declined from 2.287B€ (Q1, 22) to 1.76B€ (Q4, 22). EBITDA margins were crushed, from 18.41% (Q1, 22) to 5.12% (Q4, 22) while net incomes completely dissipated (in Q4, 22 Acerinox posted a 184M€ loss). This was driven to some extent by the 204M€ write-down of the company’s Barhru Stainless operation in Malaysia.

There is 1.54B€ cash presently on the balance sheet so no immediate signs of a liquidity crunch. Receivables have significantly lowered (from 1B€ to 660M€) as the company looks to pull forward cash inflows to fund any operating needs.

Despite the cyclical nature of some of the product lines, inventory at 2.1B€, up from 1.7B€ one year earlier, looks worryingly high. In 2022, the company issued 1B€ in new debt, electing to extinguish 900M€ in old debt while also repurchasing 206M€ - it's noteworthy that this is the largest share buy back by the firm in its history.

Risk

The record results by Acerinox obscure perhaps some underpinning risks future investors may face. 50% of the company’s revenues are generated in the United States. As recessionary fears mount and credit markets tighten, project capital expenditure for the company’s future US investment may prove difficult or simply uneconomically viable.

The strong US dollar means that alternative export options are limited, and a capitulation of the US economy would likely spread to Acerinox's other major markets (Europe). The company’s exposure to growing Asia presents some opportunity if the company succeeds in carving out market share.

The Spanish steel making venture has suffered a succession of inventory write downs and the 204M€ impairment for Bahru Stainless perhaps does not bode well for the integration of VDM. It's positive that the firm is strengthening its exotic steels business, but both remain exposed to economic headwinds bound to dampen industrial activity.

Key Takeaways

For investors looking for exposure to thriving growth in US industry, Acerinox with its leading market share could be the right place to look. The Spanish stainless steels maker, rich with 50 years of experience, has a strong position in the United States with 50% of its sales originated there.

But that is the very problem – the United States is likely to fall into recession in the second half of the year with lagging industries such as industrials quickly to follow. While company specific traits of Acerinox are attractive, it is hard to be bullish when macro-economic sentiment is likely to meaningfully dampen.

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