Aperam is a steel producer that focuses on segments of the steel industry that have a high added value - stainless steel and so-called special alloys. The company is reasonably valued and most of all, carefully capitalized.
While the share price has declined, fundamentally nothing has changed. The results of the last financial year are satisfying and confirm the positive trend that has been triggered since the company flies on its own: the sales increase (from $4.2 to $5 billion) and the operating cash-flow generation remains stable at $440 million.
With $186 million invested in the expansion and modernization of the production facilities, the free cash flow comes down to $254 million for the financial year. From this amount, $121 million has been distributed to the shareholders, while a significant share buyback of $98 million is meant to cover the dilution caused by the debt conversion. The latter was done to reduce debt.
The cash profit - normalized over the last three financial years - comes down to around $270 per year, or $3 per share - on a diluted basis - that’s 2.60 EUR at the current exchange rate. At 37 EUR per share, the stock is thus roughly being traded at 14 times its profit.
This a priori reasonable valuation explains itself by the protectionist escalation started by the United States in the aluminum and steel field - fortunately, the US represents only 6% of Aperam’s sales. The valuation is also explained by the growth profile of the company which is modest because it’s structurally indexed to the growth of the GDP.
Except in case of a spectacular increase of the steel price, the only way to accelerate the rhythm would be to make a transformative acquisition - but this isn’t without its risks since it usually obliges the acquirer to get themselves into debt to finance such an operation; in that regard, the downfall of the Mittal group following the acquisition of Arcelor and the difficulties that ThyssenKrupp has been facing for years will without a doubt cool off some enthusiasm….
It’s thus a modest acquisition that Aperam has made three months ago: that of the German group VDM Metals for 438 million euros. This acquisition will strengthen the company’s position in special alloys without degrading its - still healthy - financial position too much.
Of course, the management predicts synergies - including cost reductions of about 20 million euros per year - as well as a positive impact on this year’s consolidated profit. Let’s welcome these declarations of intention, but let’s not forget that the majority of acquisitions usually struggle to produce the expected results…
(On that note, the author highly recommends reading the excellent Billion Dollar Lessons, What You Can Learn From The Most Inexcusable Business Failures Of The Last 25 Years
Let’s note by the way that VDM metals has so far known a trajectory that’s at least…surprising. The company has changed owners several times these last years: ThyssenKrupp sold it to the Finnish company Outokumpu in 2012 before the latter sold it back to…. ThyssenKrupp the next year!
In 2015, the German conglomerate finally gave it to private equity firm Lindsay Goldberg Vogel for 500 million euros. Aperam ‘only’ paid 438 million to buy it - a multiple of eight times its operating profit - which leads us to believe that Goldberg Vogel hasn’t managed to straighten out VDM, and prefers to take a net loss from the resale rather than to insist on sorting things out.
This peculiar history makes the synergy promises thus hypothetical, even though Aperam’s management disposes of an undeniable expertise in this domain.
More generally, and despite the difficulties that are inherent to Aperam’s activity - after all, it’s easier to make money in the software industry than in the production of steel - let’s remember that the company defends an excellent competitive position in two recovering geographies - Europe and Latin America - in a global context that’s improving for steel, mainly thanks to the anti-dumping measures taken against China.
Aperam also has a better balance sheet and a margin profile that exceeds that of its three main competitors in Europe, the Spanish company Acerinox, the Finnish company Outokumpu and the German company ThyssenKrupp.
The impact of an open trade war between the big economic powers remains difficult to quantify. It is indeed quite likely that the steel price increases in Europe if custom barriers are put in place…. These uncertainties are included in the price, but if Aperam continues to improve its margin profile, if the start of a new cycle is confirmed and the acquisition of VDM delivers the expected results, an expansion of the multiple is quite possible in the more or less short-term.
This is why this idea could be interesting for those who like big capitalizations with a low valuation, in a register that’s a bit similar to the Repsol
case, featured here last month. If he had to choose between the low valuations of the moment, and purely in a subjective way, the author would, however, opt for Tessenderlo
Article translated from the original article
Article published on 07/13/2018 | 11:19