2023-06-23 18:08:12 ET
Summary
- Aurubis is a German investment I've been covering in two previous articles, active in the attractive recycling market.
- The company has been too expensive for an investment during my last two articles but recently dipped below the €80/share threshold, making it a potentially attractive investment.
- I give you my updated share price target and rate it a "Buy" for the first time.
Dear readers,
I've covered Aurubis ( AIAGF ) as an investment a few times before. I have not yet invested in the company this year and/or added to my position, but I believe the company is starting to approach valuation levels where I can start considering it an acceptable investment for 2023. In my second article, the company dropped more than 10% from the first article, which was also a "HOLD". Since the second article, the company has gone ahead and declined even further, and we're now at a sub-€80/share price.
This is starting to look like a good share price. If you recall my last article, my official PT for the company at this time was between €50-€60 conservatively, but I believe that we can start buying at around €78/share - at least, during my last article.
We're now very close to this level.
Let's see what sort of upside and trends this company now offers.
Aurubis - Is it worth your money yet?
In a word, yes. I believe Aurubis is fundamentally worth your money - but we're going to have to clear up some questions prior to investing - because your expectations are important here.
The company quite recently reported the first 6 months of 22/23 - about a month back. The company's operating EBT is down below €300M from €331m the year before. Negative, but not entirely unexpected because the company's YoY results were extremely high. The fact that we have a €290M+ for the company here is a positive in itself. The same is true for ROCE numbers and cash flow numbers - not really comparable, because YoY was such an outlier sort of period.
The markets showed good trends. Concentrate markets were good, and the company's sulfuric acid segment delivered good figures, despite YoY lower revenues and elevated overall costs. Energy costs were well-managed, despite the energy crisis that in some parts is still relevant for Europe here. The company saw overall lower metal results primarily due to input materials but remains a good contributor overall.
The results were good enough that Aurubis is increasing its EBT forecast. The company now expects upwards of €550M for the full year, due to ongoing strong operating performance from the Pirdop smelter and stabilizing performance in 2Q.
Net cash flow is very low - €19M - but this is due to a temporarily elevated level of working capital, which needs to be taken into consideration here. Overall, every metric shows negative - but this is where understanding of the historical results and the company's performance comes in.
Aurubis remains a play primarily correlated to energy and commodity trends. specifically, we're talking about Sulfuric Acid prices, Copper prices, premiums, refining charges for scrap, and TC/RCs for copper concentrates. Aurubis has outperformed primarily because these prices, during 2021-2022 especially for Sulfuric acid, have seen extreme fluctuations. They are now slowly normalizing.
Company gross margins are at the prior-year levels. The current sales mix is made up of metal gains, premiums and products, and treatment charges for recycling input on about a 34/35/31 split. That's an attractive split with no real overexposure to any one segment - of course, there is an overall exposure to commodities and relatively volatile trends to begin with.
Positives include that the company managed to actually significantly reduce its energy costs. On a total cost/expense look, the company has managed to reduce energy costs by 2% of the total, personnel costs by about 1%. To make up for this, other OpEx, external services, and consumables have gone up as a portion of the total cost/expense - and overall expenses are somewhat higher than last year.
A deeper look at the energy costs the company is managing shows us that it's mostly electricity, including oxygen - but this is down significantly since last year to 59% of the total compared to 75% last year, with nat gas taking the place of most of that, up to 36% of the total. The company has managed to reduce energy costs by more than €10M in about a year.
Aurubis remains focused above all, on growing the business. This might seem counterproductive during a time of downturn. However, as someone with very low leverage and debt myself, I am telling you that if you're (as a company or as an individual) in a position of a lot of cash or liquidity here, this enables a lot of good possibilities - including investing and growing.
Aurubis is in such a position. The company has an above-50% equity and a negative net financial liability/EBITDA on a rolling-12 month period, with a target of below 3x.
This, combined with a promising outlook for 2023 is what cements a positive potential assumption for this company here.
I expect an increase in mine-supply side concentrate, with increased interest due to new demand and an already-planned expansion of existing mine assets. This will in turn supply the already well-supplied smelters of Aurubis, which already have enough feedstock to manage 4Q.
Because of that, the company confirms that they're well-supplied with copper scrap and more complex recycling materials. The current market trends show a reduced demand from the chemical and fertilizer industries, with both European and overseas markets showing reduced activity levels overall.
Here is the company's updated guidance for this particular year.
Remember, Aurubis is one of the most solid companies in this entire segment in my view. With a debt-equity ratio of 0.07x and interest coverage of almost 28x, there are few companies better prepared for a downturn or troubles here. While their margins compared to other companies in their relevant segment - industrial products - aren't market-leading, it's hard to equate or categorize Aurubis efficiently - kind of like with a company like Neste (NTOIF). Most financial data services put the company with peers like ATI ( ATI ), ThyssenKrupp, China International Marine Containers, and Western Superconducting Technologies.... you get the picture. Many of these businesses don't even share similar processes, let alone similar industries. But they're industrial products.
Just keep that in mind when I say that the company's margins aren't market-leading in their segments. Despite the implications, Aurubis has very solid margins for what they do. Their revenues to net income "works". It's an operation that has a lot of COGS - over 90% of its revenues go to the cost of goods, with very minuscule, sub-5% operating expenses, which also means the company's net income margins are at around 4%. Still, the company is consistently profitable, and to say that this is good for the segment, or that the company's cash/debt looks "good" is an absolute understatement.
What sort of strategy for growth does the company employ? In the short term, Aurubis expects to work with about €1.1B of growth CapEx, with the Richmond Module 1-2, Pirdop Tankhouse, and a few other projects which will add €260M to the company's annuals, starting in 2026. €170M of this is from Richmond alone. Another €280M of CapEx for growth is slated to be approved by the board and strategy, which could bring in another €70M in EBITDA, increasing EBITDA by over €300M in total from additional strategic projects in addition to the first mentioned. This includes things like modular recycling systems, battery recycling, and so forth. These projects are not yet included here but are actively pursued.
Until 2030E, the company expects to scale up and add significant growth and projects - and battery recycling remains a priority here.
Let's look at what we have in terms of valuation here.
Aurubis Valuation - far from perfect, but finally enough for my first position
Aurubis has been overvalued for some time. While it's certainly too early to call the company "cheap", I believe it's time to invest here and add to my existing position - if only barely.
Aurubis is currently being traded at an average P/E of 8.5x compared to a 5-year average discount of 11-13x, no doubt owing to its somewhat low margins compared to peers. With the new EBITDA/assets coming online within the next few years, I believe Aurubis will be in a position to outperform.
The company is no doubt going to see a decline in adjusted EPS this year. 2022 was a monster year - it's probably not going to be repeated. The question is what happens after 2023? FactSet sees more declines, essentially seeing the company flat until 2025E. To a 10x P/E, the company currently offers no more than 8.5% per year, or 20% in 3 years.
However, I choose to take a more positive stance here in light of recent outperformance. I'm now willing to forecast Aurubis at around an 11-13x P/E, which brings the potential upside to almost 20% per year annually, or 50% in less than 3 years. Given what the company does, this is very attractive to me.
S&P Global analysts give the company a generous price target. A €99/share average from a range of €73 to €128. 7 analysts follow the company, and since my last article, the majority tone has shifted. Out of these 7, 5 are now either at a "BUY" or an "outperform" rating as the company dipped below €80/share.
I add my voice to this choir. The company may not yet be where I would call it "cheap". There's downside potential, especially in the light of further commodity instability here - but at the same time, there's plenty of great upside potential in this investment.
You also have to consider what you're investing in - essentially recycling, which is one of the safer things that I view you can go for - such as Tomra ( TMRAY ), but in a different field. If the company also goes into battery recycling, that's adding even more upside to the mix.
Aurubis's long-term story is far from written. But in this story, I believe we're now at a chapter where we can start buying again. The last time was back in 2022 - so this is a great opportunity, in my opinion.
Here is my current thesis for the company.
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.
- As of the latest quarterly report, some of the expectations for 2023E are somewhat more crystallized, and what I would consider clearer than before. This enables us to act with more confidence and also shift our PT.
- I own stock in Aurubis, and I'm up over 40% in less than 6 months - and now I believe we can add more.
- I now say (in June of 2023) that Aurubis is a "BUY" at around €80/share or below for the common. This is a change from my last PT for the company, which was below €80 back in April.
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.
We finally have enough positives for our first "BUY" from this company here - and I'm changing my rating.
For further details see:
Aurubis: German Upside In Metals And Fundamentals