Summary
CSN appears to have turned a corner following years of deleveraging, highlighting a compelling growth strategy at its investor day.
Helped by a rich pipeline and a more robust steel outlook, CSN looks set to outperform in the years ahead.
CSN’s ESG leadership within the steel and cement industries should also justify a sustainability premium going forward.
With shares down to near-trough valuations, I see plenty of room for a re-rating over time.
Nordroden/iStock via Getty Images As outlined at its recent investor day, Companhia Siderúrgica Nacional ( SID ), a diversified Brazilian steel company with interests across mining, cement, logistics, and energy, has a strong business portfolio offering plenty of longer-term growth potential. Unsurprisingly, management struck a constructive tone throughout the presentation, dismissing the pessimism surrounding the sustainability of earnings into fiscal 2022 and calling for healthy market trends across all divisions. With the investment case also de-risked following recent steps to deleverage the balance sheet, the relatively low c. 3x EV/EBITDA multiple seems unwarranted, keeping me bullish. Kicking Off the Longer-Term Growth Strategy with Geographic Expansion
Fiscal 2021 may have been a bumper year for CSN in terms of its accomplishments (recall CSN completed the IPO of iron ore mining subsidiary, CMIN, and two significant cement acquisitions), but the company is not resting on its laurels. Perhaps the most notable strategic shift was CSN’s geographical diversification efforts – having struggled to deleverage in recent years, the new emphasis on foreign investments marks a clear return to the growth path. Specifically, CSN is targeting $3 billion of investments overseas, focused on low-ticket brownfield expansions in Europe and greenfield steel projects in the US. CSN Investor Day Presentation Slides Headlining CSN’s current pipeline is a more mature US-based project with a 400-450Kt/year rolling line of coated flat products requiring a capex of c. $350 million (excluding potential synergies with the Brazilian business). The next big US project is a greenfield mini-mill for long steel with 300-500Kt/year of capacity (depending on the final configurations), with a higher capex commitment of $350-400 million. Meanwhile, the European strategy is focused on expanding the capacity of existing plants in Germany and Portugal, with capex of c. $85 million set to drive a doubling of the overall capacity. For now, opportunities in Brazil remain unconfirmed, although a new dual Galvalume line or a pre-painted expansion could potentially be in the pipeline. I view the updated capital spending plan positively –the balance sheet not only adequately supports the commitments, but the relatively cautious deployment also illustrates capital discipline by management. Emerging Signs of a Steel Recovery
Management’s latest steel guidance indicates it is likely working with a more upbeat scenario relative to market participants – notably, CSN dismissed any concerns of a drop in steel demand next year, calling for a resilient EBITDA/t of $400-450/t in fiscal 2022 (vs. $550/t in FQ3 ‘21). Underlying the guidance is an assumption for flattish volumes ahead, although management’s confidence in the potential for 5-6% Y/Y growth amid higher exports and optimistic conversations with main end-users suggest further upside here. For now, CSN’s demand growth expectation stands at 4-6%, driven by light vehicles (+11% Y/Y), trucks/buses (+23% Y/Y), and heavy equipment (+12% Y/Y) amid a more resilient construction sector. Improving auto demand could also be key following supply disruptions, while the more positive commentary around retail demand should ease any lingering concerns. Also boosting the outlook is China, where indications of a structurally tighter market amid capacity constraints and declining steel exports could be a tailwind for steel prices globally. Finally, a potentially weaker BRL environment should provide support to domestic prices as well, and therefore, I see plenty of scope for upside at CSN’s steel unit. CSN Investor Day Presentation Slides Enhancing the ESG Leadership at CSN and CMIN
Encouragingly, CSN appears to be stepping up its ESG standards. Notably, the CO2 emission targets were doubled to a 20% cut by fiscal 2035 (from a 10% reduction by 2030) despite current CSN CO2 emissions already corresponding to an impressive one-third of the five largest global players. To achieve this, CSN will invest R$5 billion in ESG projects through fiscal 2035, including investments in renewable energy, reduction in water consumption, and the CSN Foundation. CSN Investor Day Presentation Slides At recently listed subsidiary CMIN, the goal is to reach carbon neutrality by fiscal 2044 (scopes 1 and 2), with an intermediary target of reducing c. 30% of its CO2 emission by fiscal 2035. Considering CSN […]
source Companhia Siderurgica Nacional: Investor Day Marks A Timely Return To Growth
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