GSM - Ferroglobe: Waiting For Strong Volume Growth Before Going In

2023-09-25 00:24:36 ET

Summary

• Ferroglobe PLC's valuation has been volatile but has been on an upward trend since January 2022.
• The company specializes in the production of silicon metal, silicon-based alloys, and manganese-based alloys, with silicon metal being its largest revenue contributor.
• The last quarter showed a recovery in demand for GSM's products, with increased sales and improved cash position, but consistency is needed before considering it a buy.

Investment Rundown

The valuation for Ferroglobe PLC ( GSM ) has been on a rollercoaster for the last 12 months. It seems to have found its bottom at least back in January of this year as the trend has been upward since then. Seeing as GSM is focusing on silicon and specialty metals their earnings can be quite volatile as the commodity prices can dictate a lot of the earnings for GSM. The TTM net income is down heavily from the 2022 results and that has weighed on the share price. The silicon metals are seeing higher volumes and quickly returning to where it was in mid-2022. If the trend continues I think the valuation of GSM will continue to rise in value. But seeing as interest rates are still quite high, the spending power of a lot of companies is down. If this last quarter is just a one then the value you get with GSM isn't that good. Because of these uncertainties, I will be issuing a hold rating rather than a buy. I am awaiting persistent volume increases before jumping in.

Company Segments

GSM stands out as a global company engaging in the production of advanced metallurgical products that find application in diverse industries, ranging from automotive manufacturing and suspension bridges to healthcare products. This multinational company boasts an expansive industrial presence worldwide, engaging in the extraction of raw materials at mining sites and the transformation of these resources into valuable metals at numerous metallurgy plants across the globe.

GSM's core expertise lies in the production of three primary product categories, collectively contributing to more than 90% of its revenue: Silicon Metal, Silicon-Based Alloys, and Manganese-Based Alloys. Notably, Silicon Metal constitutes the largest share of GSM revenue, with the company holding the distinction of being the leading producer of this essential material in the Western World. The primary consumer of silicon metal is the chemical industry, relying on GSM high-quality silicon for the manufacturing of various products, including solar cells and electronic semiconductors, underscoring the company's pivotal role in advanced technology and clean energy sectors. With GSM seeing a recovery in the largest segment of the business investors the markets have been increasingly positive towards the business and this seems to have been resulting in the share price increasing since January of this year.

Earnings Highlights

The results from the last quarter showed a recovery and rebound in demand for the products that GSM has. The sales increased by 14% QoQ. But the quarter didn't only hold improvements in the topline, GSM also made strong progress in rallying the cash position as it rose to $363 million and did not put GSM in a fantastic financial position as the net debts are only $37 million. The company continues to see a massive market opportunity in the solar and battery markets where its silicon metals and alloys are used.

The solar market for example is one of the fastest growing right now and is expected to keep up the momentum as well. In a report, the anticipation is a global market growth of 12.72% yearly up until 2028. This rapid increase I think should be visible in the demand for products of GSM. Ultimately this will result in higher sales and if GSM can expand the margins efficiently it looks quite cheap right now.

On a p/s basis, GSM looks quite cheap as it trades at an FWD multiple of just 0.62, over 40% below the sector median. If the last quarter is the beginning of another boom for the company in terms of sales then this is a very good price to get in at. But as I have said before I would like to see some consistency before suggesting that it's a buy just yet.

What I looked at a lot in the last income statement was the sales increase, but also the fact that GSM was able to see an improvement in the raw materials and energy consumption for production. This indicates to me the company is becoming more efficient and able to raise the operating margins as a result. Prices are also shown to be improving as demand for solar and batteries is persistent.

Risks

One notable concern regarding GSM revolves around the gradual share dilution observed in recent years. Although the company's earnings reports have been subject to market volatility, the overarching trend indicates sustained growth. This growth trajectory is driven not only by the increasing adoption of solar panels but also by several other favorable factors, including the expansion of EV manufacturing and related developments. While these tailwinds offer promising prospects, investors need to monitor the potential impact of share dilution on the company's financial health and long-term growth potential.

GSM currently trades at an attractive valuation for a metals company, despite its primary segment, silicon metal, being a crucial component in solar panel production. There's potential for the company's valuation to improve significantly once it successfully addresses the constraints posed by its high-coupon bonds and begins returning cash to its shareholders. However, it's important to acknowledge that fluctuations in market prices for any of its products could continue to exert downward pressure on the company's valuation, warranting cautious consideration by investors. The last quarter showcased improvements in the prices that GSM can charge, but if it's a short-lived trend, the share price may return to a downward trajectory as it had previously.

Final Words

I think that GSM is an exciting opportunity to get differentiated exposure to the growing battery and solar markets. What I want to see though before suggesting that GSM is a buy is a prolonged increase in the volumes. The last quarter showcased an improvement but if the coming two-quarters at least show the same results I would say that GSM is an attractive buy. The company trades at a discount to the broader sector medians for both earnings and sales. For now, though, I don't see an issue just holding shares.

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