APMSF - Aperam: Offering A 7% Dividend Yield Trading At 7x Earnings

2023-07-24 11:30:00 ET

Summary

• Aperam is one of the largest producers of stainless steel and is now also focusing on alloys.
• The Q1 EBITDA was still fine, although margins clearly are under pressure.
• The FY 2023 EBITDA may be lower than I initially expected, but the EPS will likely exceed EUR4 (including a non-recurring element).
• Analyst consensus is pointing towards a EUR600M EBITDA in 2024 and 2025, which would result in a free cash flow result of around EUR4.50 per share.
• The company pays a quarterly dividend of EUR0.50, which is fully covered by earnings and cash flows.

Introduction

Aperam ( APEMY ) ( APMSF ) still has to report on its financial results in the second quarter of this year, but I took advantage of the recent weakness by writing some put options (mainly out of the money). In a previous article, I mentioned I was very interested in establishing a long position in Aperam, but I thought there would be more opportunities to pick up the stock throughout this year. The recent weakness appears to be one of those opportunities, but at the same time, I acknowledge the next few quarters may continue to be tough on Aperam. My decision to write additional put options is just a first step to establishing a meaningful position in Aperam ahead of the company reaching its targets for 2025 .

Aperam's main listing is on Euronext Amsterdam, where the stock is trading with APAM as its ticker symbol (that also is the exchange where I wrote my put options on). The average daily volume is approximately 190,000 shares , making it the most liquid listing with an average monetary value of about EUR6M per day. There are approximately 72M shares outstanding, resulting in a market cap of just around EUR2.1B. I will use the Euro as the base currency throughout this article.

The first quarter was still okay, but choppier waters ahead

This article is meant as an update to my previous articles on Aperam, wherein I discussed the business model and the company's ambitious plans (to grow the EPS to EUR 6.5-7 by 2025 ) for the next few years in greater detail, so I would recommend you to have a look at those older articles. You can find them all here .

Although I was expecting Aperam to experience a tough year, the company's Q1 result was still pretty strong, although the margins were undeniably lower. The total revenue in the first quarter came in at EUR1.88B , which is about 10% higher than the total revenue in Q4 2022, but the EBITDA decreased by EUR2M, resulting in an adjusted EBITDA margin of 6.8%. That's obviously lower than the 8% generated in Q4 2022 and substantially lower than the 16% EBITDA margin in Q1 2022 when the company enjoyed a massive structural tailwind.

The operating income remained unchanged (but the margin obviously still decreased considering the total revenue increased), while the pre-tax income was boosted by a EUR86M financing income. This makes the net income of EUR132M tough to compare with the EUR0 income in Q4 2022 and I think it's more fair to use the normalized net income of EUR54M. The finance gain was caused by the non-cash value increase of the nickel hedges. The cash cost related to the financial items was about EUR10M for the quarter. And, of course, the net income, even on an adjusted basis, is high enough to cover the quarterly dividend of EUR0.50 per share (which requires Aperam to pay just over EUR36M per quarter).

Looking at the cash flow result, we see a total operating cash flow of EUR138M and after adding back the net investment of EUR23M in the working capital position, the underlying operating cash flow was EUR161M and the free cash flow was close to EUR119M EUR. That being said, if we would remove the EUR53M in 'other' operating activities and use the sustaining cash flow ( budgeted at EUR150M per year , so EUR38M per quarter), the underlying free cash flow per share was approximately EUR80M or EUR1.10 per share. This is mainly thanks to the EUR8M difference between the depreciation expenses and the sustaining capex while Aperam's cash tax payments were lower than anticipated as well.

As of the end of Q1, the company had EUR442M in cash and EUR851M in debt for a net debt level of just over EUR400M. This is anticipated to have increased in the second quarter due to a build-up of the inventory levels ahead of some maintenance downtime in Q3. As the market remains soft, that maintenance shutdown comes at a good time as the company obviously wants to keep the production rate cranked when prices are high.

Investment thesis

On a normalized basis and excluding the non-cash gains on the nickel hedge book, the EPS in the first quarter was approximately EUR0.75. That's not bad at all, and considering Aperam was guiding for a higher EBITDA result in the second quarter, the total EPS in the first semester may actually exceed EUR1.50 per share.

The second semester may be weaker. While Aperam has not published a revised Q2 guidance, ABN AMRO reduced its target price at the end of June, which sent the company's share price below EUR30. I think this is a good level to pick up stock. The consensus estimate calls for a EUR477M EBITDA this year before it bounces back to EUR600M in 2024. But even at this year's weak EBITDA estimates, the EPS is still anticipated to come in above EUR4 per share (including the non-recurring finance income) while the sustaining free cash flow should exceed that number as the sustaining capex is lower than the depreciation and amortization expenses. And applying the EUR600M EBITDA in 2024 would result in a net income of EUR320M, or close to EUR4.50 per share.

This also means the dividend - which is anticipated to be EUR2 per share this year - is safe, resulting in a dividend yield of approximately 7%. Aperam is a Luxemburg-based company, which means there is a 15% foreign dividend withholding tax applicable.

An additional element of why I'm feeling confident enough in Aperam is the balance sheet. Although the net debt will likely have increased on a QoQ basis, let's not forget the total net working capital position will remain very strong. Aperam ended Q1 with a positive working capital position of just under EUR1.9B, which pretty much is its entire market cap. And its tangible book value still exceeds EUR42 per share.

While I expect Aperam's guidance for H2 to be pretty soft, I have a multi-year investment horizon and I have no problem giving the company additional time during a downcycle to sort things out. And this downcycle shouldn't even be too tough for Aperam as it will likely still generate an EPS of around EUR4 per share.

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