2023-04-23 04:31:21 ET
Summary
- So, Aurubis. You probably know the company somewhat from my latest article where I gave an introduction to this Germany-based copper play. It's an attractive company at the right price.
- Aurubis has declined significantly since my initial "HOLD" rating, which confirms my thesis. I'm looking at establishing an Aurubis position in the long term.
- When the market rocks, I take shelter under quality - not hopes and dreams. And Aurubis is quality.
Dear readers/followers,
If you follow my work closely, you'll have noticed the first article on a specific business - Aurubis AG ( OTCPK:AIAGF ). I presented this company to you, and went into the thesis with a firm "HOLD" due to overvaluation relative to its quality. After my article, we went into the banking crisis and other downturns, and Aurubis followed suit.
Since my last article, Aurubis is down more than 10%.
Does this mean Aurubis is a bad business? No, it means that we're successful valuation investors and realized that the price at which Aurubis was being traded was well above what it was actually worth.
My previous PT for Aurubis was a clear €80/share. With a share price of €85/share, we're not below my PT yet - at least not my last PT. Let's see what we have going for the company after this drop though, and if there are reasons to give the PT a boost here.
Revisiting Aurubis and its Upside
Aurubis is actually a really great company. Its exposure to a mix of recycling, processing, and products means it covers a large part of the CU value chain. Its extensive history, quality portfolio of assets, and global network of customer/supplier relationships make it a major, if relatively unknown, player in the field. It has a motivated large-stake owner in the form of German Salzgitter AG ( OTCPK:SZGPY ), which in turn owns hundreds of subsidiaries in the metal industry.
This makes Aurubis a basic materials/metals business, primarily in the production of copper cathodes from concentrates, scrap, and recyclables. If you need wire rods, shaped rods, rolled products, or strips, Aurubis is likely on your supplier list. The company, due to its extreme expertise built over 240 years in the metallurgy segment, the company also processes precious metals like gold and silver - but copper remains its clear and primary focus.
As I said, you might not know Aurubis if you're NA-based, but it's a very well-known business in Europe. Not just Europe either, no. Aurubis is world-leading in copper scrap, flat-rolled copper products, and specialty wire. It's either top 5 in Europe/worldwide in key areas, and saw only marginal COVID-19 impacts, excluding SCM and the sort of macro Aurubis can't control.
The latest results for Aurubis are better than you might have expected from the company. We have 1Q22/23, which saw Aurubis generating good EBT - around €125M for the first three months. Nonetheless, it was below the YoY period.
Overall demand for the company's products remained at high levels, but the problem, as you might expect, was the impact of significantly higher overall energy costs on operations, along with cost increases in input materials/feedstock which turned earnings lower on a YoY basis. Proportions, as I've said before for the company, are appealingly diversified.
Much of the operations were positive, with the Pirdop site a highlight due to very high concentrate throughputs, in fact on par with the levels seen a year before. However - as positive as the operating performance delivered was, Aurubis could not beat the currently ongoing energy and macro demand/profitability problems. The market was stable, and Aurubis managed an operating ROCE of just above 16% - this was below YoY of almost 18%, but that was a very high overall period - and it's really a question of normalization at this point.
Costs are up for the company - specifically, increased operating expenses, energy costs while managing to lower personnel costs somewhat. Still, on a high level, OpEx was up to over €450M, from a YoY level of €419.
Fundamentals and financials remain solid though. At 54.5% equity, there are really no fundamental worries to be had, and what we should be looking at is the market forecast for the coming year. The company expects an increase in the concentrate supply from the mine side, and Aurubis smelters are already supplied in terms of concentrate up until 3Q of 23. The company also doesn't expect a material negative impact in copper scrap or other recycling feedstock, with supplies already secured until 2Q. This gives us relatively good visibility going forward into the year.
With premiums set, and most other copper product demand expectations at high levels, the only issues for Aurubis are energy costs and the Sulfuric acid segment, which shows reduced demand from both chemical and fertilizer companies, with lower pricing levels.
Aurubis expects the income from these segments to drop.
On the project side of things, Aurubis is continuing to build its Richmond facility - though the construction work is still mostly in the early stages, and have broken ground on the ASPA project - an advanced sludge processing facility.
With results as good as this, it comes as little surprise to me that the focus on sustainability and green agendas is buried pretty deep. Aurubis is working with tests for blue ammonia in copper rod production, which enables low-carbon ammonia to reduce the company's Co2 footprint. However, Aurubis as a business already has only half the Co2 footprint of the overall average for the industry.
The company's growth ambitions are mostly intact. The company expects about a billion euros of growth CapEx, with key projects here including Richmond and ASPA as well as a few others. EBITDA is targeted to be close to a quarter billion on an average run rate from these projects, starting with €170M from Richmond alone.
The company also has projects in the pipes until 2030.
The recommendation to the Aurubis ASGM is an increase in the dividend as well, which puts the current yield at around 2.1%. This is materially improved from my last article, but we've also seen a significant share price decline - so no surprise there.
Remember, Aurubis is a company I believe you should want to own for a myriad of reasons.
Copper is definitely a big part of the future, and as a specialist supplier of these, Aurubis should be on your shopping list. Aside from the advantages mentioned above, Aurubis also has no debt/net cash position, a strong equity position, superb interest coverage, very strong profitability.
The company goes into 2023 with both eyes open and very few fundamental risks dragging things down. Despite cost increases, it operates at a positive ROIC/WACC relationship and hasn't been unprofitable here for more than 8 years.
You could, in fact, have bought Aurubis at extremely cheap prices back in late 2022 - I have a small position in the company, but it's not one I've been keen on expanding for the past few months.
Here is why.
Aurubis Valuation - Still not good enough
When I last wrote about Aurubis, I gave the company a "HOLD" due to the high valuation. Despite this being somewhat improved here, I still say that Aurubis is slightly too expensive at this time.
My current forecast for Aurubis, based on global copper trends as well as the company's exposure to sulfuric acid prices, is that the company will see an EBT/EPS decline in 2023, followed by mostly flat development in 2024 until some of its growth projects come online. Aurubis typically trades at a premium of 10-12x, and currently is at around 9.9x normalized/average, with the current ADR AIAGF P/E you see on SA at around ~8.15x - though again, this is the ADR.
While we can see an upside to the upper ranges of 11-12x, the forecast to a conservative 10-11x P/E under current forecasts comes to less than 5% per year, and that is including the company's relatively low dividend.
Buying this sort of company in the beginning of an EPS downcycle or flat trend is not something I'm very keen on. There are many companies out there - solid cash flow generators - that will not only pay you an attractive, recurring income of 3-7% for your capital but also come with a 6-12x massive P/E upside in the form of capital appreciation.
If we were below €80/share, we could see a 7-8% upside to an 11x P/E, and this is the highest that I am willing to currently go for Aurubis. Unless I feel confident that the company will somehow grow differently or outperform in another way, I can't rightly justify investment at these multiples or assumptions.
Street targets for Aurubis are characteristically exuberant. 7 Analysts follow the main ticker at lows of €69 to highs of €136 (I would love to the case assumptions and sensitivity tables for that €136 recommendation), with an average of €101/share. Such a PT demands very high returns, or premium on the part of this company. However, out of 7 analysts, only 2 give the company a "BUY" with this average, meaning the conviction these analysts have for their own targets is low - and I can't fault them. Most analysts are either at "HOLD", Underperform or even "SELL". (Source: S&P Global).
If anything, the negative outlook for Sulfuric Acid causes me to conservatively adjust my PT even further. As of this article, this impact and the slight overall worsening of macro causes me to target more along the lines of €78/share for Aurubis. It's a bit nitpicky, but I do think it is important to point out in a case such as this.
You don't want to go into a company such as this unless you're getting a good deal. If you get that, your potential from an investment can be massive . Just look at what RoR you could have gotten, if you'd bought the company at trough back in the fall of 2022.
Now, I personally didn't rotate when the company went above €100/share. I'm waiting for the target to come below my PT again, preferably even to the €50-€60/share range so that I can put money to work.
There is plenty to like here - at the right price.
This brings me to the following updated thesis for Aurubis.
Thesis
- Aurubis is a market-leading German metallurgy company in the segment of copper, other non-ferrous metals, and precious metals, as well as the byproduct of Sulphuric Acid. The company has one of the most extensive expertise on the planet for this particular field, and it deserves more than the attention it's getting here at this time.
- I own stock in Aurubis, and I'm up over 40% in less than 6 months. However, this company is currently overvalued, and I would say that you should not buy the company here.
- Instead, I now say (in April of 2023) that Aurubis is a "BUY" at around €78/share or below for the common, and I would say "HOLD" at this time, but to keep a close eye on the business. This is a change from my last PT.
Remember, I'm all about:
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
The company doesn't fulfill my valuation-related criteria. This makes it a "HOLD" here.
For further details see:
Aurubis: An Update After A 10%+ Drop