Russel Metals Inc. (TSX: RUS) is one of the leading metals distribution companies in North America and conduct business primarily through three segments: metals service centers, energy products and steel distributors.

Key Investment Rationale:

• Diversified Product offerings: The corporation deals with a wide range of steel and other metal products, ranging from structural, plate, flangers, flat rolled, pipes etc. This is impressive as it provides lower dependence on each segment, which further result in a balanced risk profile. The group is also focusing on repeat maintenance and repair work for the several energy assets, which offers consistent income. In the recent past, the company also considering on several value-added products and services with a typically breakeven period of less than three years and carries higher margins than its conventional products and services.

Source: Company Presentation 

• Attractive Dividend yield: The stock of RUS carries an attractive dividend yield of ~4.589% on an annualized basis, which looks impressive considering the persisting interest rate scenario. Moreover, despite the sluggish economic scenario, the company distributed total dividend of CAD 95.4 million in FY21, as compared to CAD 94.5 million in FY20. This looks impressive as most of the companies are lowering their dividend payment in order to retain liquidity.

• Strong momentum from the Steel Products: Due to the robust demand for steel products during FY21, steel prices rose exponentially during the year and remained well above historical levels. The company’s metals service centers experienced an 62% y-o-y increase in selling price per ton in 2021. Notably, due to the rising prices, the company’s Metals service centers and Steel distributors segments reported its revenue of CAD 2,831.2 million and CAD 553 million, respectively, in FY21, as compared to CAD 1,621.8 million and CAD 261.9, respectively, in FY20. The company’s EBIT margins from the Metals service center and Steel distributors segment stood at 17.1% and 19.9%, respectively, in FY21, as compared to 6.4% and 3.5%, respectively, in FY20. These factors have very well contributed to the overall growth of the company.
  

• Acquisition of Boyd Metals: During the fourth quarter of FY21, the company acquired Boyd Metals at a price consideration of USD 125 million. Boyed operates through five service centers across the North American regions with ~320,000 square feet of combined office, operations and warehouse space. Moreover, Boyed commands higher margins than Russel service centers located the same region. These are expected to expand the company’s footprint across the U.S. market and would boost the margins as well.
  

• Transformation from low-margin to high-margin business: During the first half of FY21, the company exited from its OCTG/Line Pipe business, as it offered lower margins than metals service centers segments. Within this segment, the company distributes steel pipe and oil country tubular products such as drill pipe and casings to name a few. This segment was heavily relied on the commencement of new drilling activity across the North America, and hence dependent on the CAPEX policies of the exploration companies. Moreover, after the divesture, the company repatriated over CAD 300 million that can be reinvested across businesses with lower volatility along with much higher margins.
  

• Industry Beating margins: In FY21, the company reported its EBITDA and operating margins of 15.7% and 14.4%, respectively, as compared to the industry median of 13.3% and 10.5%, respectively. This was supported by efficient cost management along with improved product pricing. The company’s net margin stood at 10.3% in FY21, as compared to the industry median of 6.7%.

Risks associated with the investment:

The company might face challenges due to the restrictions imposed due to Covid-19, which might lead to supply chain disruptions. Moreover, the demand for the company’s product depends upon the prevailing economic conditions, and lower construction activities due to economic cycles might dampen the company’s sales volumes.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Strong Revenue Growth: In FY21, the company reported its revenue of CAD 4,208.5 million, which is significantly higher than CAD 2,688.3 million in FY20. During the period, the company reported exponential growth from its metal service centers and steel distributors segments, while the income from the energy products segment stood slightly higher in FY21.
• Increase in Input costs: During FY21, the group witnessed higher input costs, such as increase in cost of materials, higher employee expenses, and a surge in other operating expenses. Despite a rising input costs, the group reported its earnings before provision for income taxes of CAD 606.1 million, significantly higher than CAD 64.6 million in FY20, supported by an elevated revenue as mentioned earlier.
• Higher net earnings: RUS reported its net earnings of CAD 432.2 million in FY21, considerably higher than CAD 24.5 million in FY20. This was supported by a stupendous growth in earnings before provision for income taxes as mentioned above coupled with lower interest expenses, partially offset by higher income taxes provision.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 19.89% stake, BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. are the major shareholders in the company with an outstanding position of 3.09% and 2.82%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

During FY21, both the metals service centers and steel distributors segments witnessed robust revenue growth due to strong demand dynamics along with a surge in in international steel prices. This resulted to a higher product pricing and an increase in sales volumes. Moreover, the company has well-established relationships with North American steel producers and is a leading steel importer in the region. These factors also supported the company for delivering a top-notch performance in FY21. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like MSC Industrial Direct Co Inc, Applied Industrial Technologies Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of RUS at the last closing price of CAD 33.12 on March 31, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 31, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on April 01, 2022, price as well

Technical Analysis Summary

Disclaimer

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