SSAAF - SSAB: A Cash Rich Steel Producer Focusing On 'Green Steel'

Summary

• SSAB is a Swedish steel producer with the Swedish and Finnish governments as its main shareholders.
• The lower steel price and maintenance outages in Q4 weighed on the result.
• In excess of 20% of the market cap is backed by net cash. A supersized dividend will be paid this year.

Introduction

It has been about four years since I last discussed SSAB ( OTCPK:SSAAF ) ( OTCPK:SSAAY ) on the open website here on Seeking Alpha. A more recent article was paywalled in August 2020 when the stock was trading at just 25 SEK per share. Thanks to a revival in the steel industry which boosted the financial performance of pretty much every steel producer in 2021 and 2022, SSAB’s share price is now trading at almost three times the August 2020 share price.

SSAB has its main listing on the Stockholm Stock Exchange where it's trading with SSAB as its ticker symbol. There are two types of shares, SSAB-A shares and SSAB-B shares. Both have the same economic rights but the B-shares are trading at a slightly lower valuation as the voting rights are just 1/10th of an A-share. As I explained in the August 2020 article: As a normal shareholder, it makes more sense to focus on the B-shares as the lower valuation outweighs the lack of a full vote unless you're an activist investor. The average daily volume for the B-shares is 4.6M shares per day while the A-shares are slightly more illiquid but an average daily volume of 1.6M shares per day which represents a monetary value of just over $11M so the A shares clearly aren’t illiquid.

The total share count is 1.03B shares of which 304.2M shares are A-shares (representing 304.2M votes) while the remaining 725.6M B-shares represent 72.56M votes. The governments of Sweden and Finland are the largest shareholders. Unfortunately the company’s website still mainly contains download-only links, but you will be able to find all the documents I'm referring to here .

The FY 2022 results are now in

"Headline investors" likely were extremely disappointed with the Q4 results of SSAB. While a general weakness was expected as the steel price continued to trend lower before bottoming out towards the end of the quarter, SSAB recorded a net loss of 30B SEK, for a net loss of 29.13 SEK per share.

Not only did this look pretty bad for the optics, it also means SSAB reported a full-year loss of 10.9B SEK for an EPS of a negative 10.57 SEK. This was actually entirely related to an impairment charge on the goodwill of certain assets (acquisitions which were completed in 2007 and 2014), and as the table above shows, the adjusted earnings came in at 22.38 SEK per share for the entire financial year while the adjusted EPS in the fourth quarter was approximately 3.18 SEK per share.

And that actually is a pretty strong result considering SSAB moved some of its planned maintenance activities forward to take "advantage" of the low steel prices: It makes more sense to shut a plant down to do maintenance when you’re barely generating a profit anyway.

The impact of the impairment charges also is clearly visible in the cash flow statement. We clearly see the 34.2B SEK in depreciation and write-down expenses are added back to the cash flow statement. And even if we would deduct the 4.92B SEK contribution from the working capital release, the underlying operating cash flow was approximately 3.3B SEK.

While SSAB does not split out its lease payments, it likely is included in the "other." The balance sheet contains 691M SEK in current lease liabilities which means the average lease cost per quarter is approximately 175M SEK. So the adjusted operating cash flow during the fourth quarter was approximately 3.1B SEK.

The capex was 2.34B SEK but despite the accelerated maintenance on some of the plants, a substantial chunk of the capex was actually spent on growth. Not necessarily on production growth, but on the switch to make fossil fuel-free steel. SSAB plans to use electrical power more often to make steel and subsequently market the product as a fossil fuel-free steel at a premium price. The total maintenance capex during the quarter was 910M SEK, as you can see below.

This means that if you exclude the investments in growth and fossil fuel-free steel, the underlying sustaining free cash flow was still a very respectable 2.2B SEK or 2.2 SEK per share. That really isn’t bad at all given the low steel prices and the stable volumes on a QoQ basis, but down on a YoY basis.

The balance sheet is exceptionally healthy, but SSAB will pay an outsized dividend

The weak fourth quarter obviously doesn’t mean the entire year was a dud. The image above shows Q1 and definitely Q2 were exceptionally strong. And when we pull up the cash flow statement again (see below), the reported operating cash flow was 18.2B SEK and after deducting 700M SEK in lease expenses and adding back the 8.3B SEK in working capital investments, the adjusted operating cash flow exceeded 25B SEK.

Even if you would include all capex (including growth capex) the underlying free cash flow was still about 20B SEK or 20 SEK per share.

This resulted in a massive build-up of the cash position and SSAB ended the financial year with 24.9B SEK in cash and a gross debt of just over 8B SEK. Excluding lease liabilities, the net cash position is approximately 16 SEK per share now.

Shareholders will be rewarded as SSAB is planning on paying a dividend of 8.70 SEK (an increase from the 5.25 SEK per share paid over the previous financial year). Additionally, the company may repurchase up to 10% of its share count.

Investment thesis

I have no position in SSAB but the very strong cash position makes the company a pretty attractive steel producer. The move toward using more electrical power to produce fossil fuel-free steel could likely work in Scandinavia and Finland as consumers tend to be more environmentally conscious which could translate into a higher willingness to pay for "green" steel.

I likely wouldn’t go long before the stock trades ex-dividend as the dividend withholding tax in Sweden is 30%. I may revisit the company either after the dividend has been cut, or if the market circumstances change fast.

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