GSM - Ferroglobe: Crazy Cheap Even With Sandbagged Guidance

Summary

• 2022 adjusted EBITDA finished at $860 million.
• Midpoint-adjusted EBITDA guidance for 2023 seems like an easy hurdle.
• 70% of the market cap is tied up in working capital.
• Company moving on its high coupon bonds.

The Quarter

Ferroglobe ( GSM ) reported a fourth quarter that was far better than feared. Adjusted EBITDA came in a $130 million versus consensus estimates of $81 million. EPS was $.42, which is down from Q3's $.64 but compares favorably to $.19 in Q4 last year.

Full year numbers came in a little below where the company was trending earlier in the year, but the numbers are still ludicrous given the valuation. Adjusted EBITDA came in at $860 million and adjusted EPS came in at $3.07. On an EV/EBITDA basis or P/E, the company is around 1.5x these numbers.

Of course, the argument is that 2022 was a once in a generation year and normalized numbers will be much lower. The other argument is that the company did not generate anywhere near $860 million of cash and has yet to return meaningful capital to shareholders. I'll address those issues one at a time.

The company guided to $270-$300 million of adjusted EBITDA for 2023. The company was asked several times from several different angles how EBITDA could possibly be below $300 million given pricing is holding up fairly well (over $2/lbs for Silicon Metal in Europe), the reopening of European customers and destocking of inventories, the $130 million of EBITDA in Q4, and higher than initially planned cost savings. The cost savings alone will be exiting 2023 at a $225 million run rate.

The company did not really answer any of the questions about the seemingly impossibly low EBITDA guide for 2023. That leaves me to believe that Q1 will be a fairly low EBITDA number, perhaps $75-80 million (where people feared Q4 would be), but that would mark the trough as Europe recovers and hopefully pricing holds up both in the US and Europe. The company said repeatedly that they expect things to improve as the year progresses.

But let's take the midpoint of guidance as the real number for this year. At $1.15 billion enterprise value, the company is only 4x. This valuation does not factor in the other salient point about this company: that this company has $705 million tied up in working capital. Back that out and the company is trading barely over 1x trough EBITDA.

The company expects about $100mm of this working capital (mostly inventory) to release this quarter. Couple that with the $323 million of cash already on the balance sheet and company will be in pretty good position to call their bonds, which are callable in July and which the company has indicated they are already trying to purchase. Once those bonds are out of the way, the company will be free to return cash to shareholders.

Risk

The biggest risks for this company are volume and pricing. We're still at healthy levels for all their refined products. Should pricing come off while volume was weak, that would obviously hurt margins. Fortunately, as I demonstrated above, the company has little net debt right now and potential to release hundreds of millions of dollars from working capital.

Conclusion

I think that in an effort to be conservative, this management team is not messaging the likely scenarios particularly well. If they see Q1 coming in below $100 million EBITDA, but see that as the low point of the year, then they should have said EBITDA will be at least $270 million rather than set a range that seems hard to realize unless the wheels really come off the US and European economies this year. Even were that the case, the company is in a strong liquidity position and valuation is so low, that most of the surprises should be to the upside. I continue to see this stock worth over $10. More reasonable communication from management could be the biggest factor holding the stock back at this point.

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