Russel Metals Inc (TSX: RUS) is a Canada-based metal distribution company. The company conducts business primarily through three metals distribution segments: metals service centers; energy products; and steel distributors.

Key Highlights

• Strong Financials in Q1 2022: Steel market dynamics improved dramatically late in the first quarter of 2022. Improved pricing and activity in both Canada and the United States enabled the company to generate more revenues as the oil market continued to revive. The company's revenue increased by 51% to CAD 1,339 million from CAD 885 million in pcp. Furthermore, each of its business sectors had good operating performance, increasing EBITDA and net profits by 19% and 22%, respectively.

• Diversified Product offerings:The company works with a broad variety of steel and other metal products, including structural, plate, flanges, flat rolled, and pipes. This is significant because it reduces reliance on each section, resulting in a more balanced risk profile. In addition, the firm is focused on recurrent maintenance and repair work for the various energy assets, which provides constant income. Recently, the firm has been contemplating many value-added goods and services with a typical breakeven duration of less than three years and greater margins than its conventional products and services.

• Higher free cash flows: On the back of strong steel price environment and good demand in the metals service centres and steel distributors segments, the company clocked higher adjusted EBITDA of CAD 153 million in Q1 2022, which helped the company to report elevated free cash flows of CAD 132.7 million compared to CAD 117.2 million in pcp.

• Steel demand getting bigger: Steel consumption is expected to rise further through 2022, owing to a comeback in non-residential construction, infrastructure projects, and overall manufacturing activity. As a consequence, despite the fact that steel prices will remain volatile, we forecast a favourable supply and demand balance in 2022. The expected rebound in oil and natural gas prices, as well as higher capital expenditure plans by energy corporations, will stimulate activity in the energy industry.

• Improving Steel prices: Steel markets were strong for the most of FY 2021, owing to high demand and limited supply. However, the prices dropped in the first quarter of 2022, but rebounded sharply in March 2022, owing to lower inventory in the supply chain, more global supply chain disruptions induced by Russia's invasion of Ukraine, and high demand. Steel wholesalers observed an increase in demand and selling prices as well.

• Lowering Inventory: Supply chain inventories are at/below normal levels as a result of the industry's significant supply challenges. We anticipate that availability will continue to decline. Inventory has decreased in both Canada and the United States, causing steel prices to rise, which is a significant advantage for the corporation.

• Attractive Dividend yield: The Company has a good dividend distribution track record and has grown its payment over the years, demonstrating stability and robust cash flow creation. This dividend pay-out technique is critical for regular income-seeking investors with a long-term view. Recently, the company declared a dividend in the amount of CAD 0.38 per share, payable on June 15, 2022. Furthermore, the stock carries an attractive dividend yield of 4.94% on an annualized basis, which looks impressive considering the persisting interest rate scenario.

Risks associated with investment:

The company is subject to a number of risks and uncertainties which could have a material adverse effect on its future profitability and financial position. Such risks and uncertainties include, but are not limited to volatility in metal prices, cyclicality of the metals industry, volatility in energy industry, significant competition, sources of metals supply and supply chain disruptions, manufacturers selling directly, laws and governmental regulations etc.

Financial overview of Q1 2022

• Higher revenue: In Q1 2022, the company generated revenue of CAD 1,338.6 million, increased 51% against CAD 885.4 million in the previous corresponding period. An increase in revenue was primarily due to strong steel price environment and good demand in the metals service centres and steel distributors segments.
• Strong earnings before interest and provision for income taxes: On the back of higher revenue the company clocked elevated earnings before interest and provision for income taxes at CAD 137.3 million compared to CAD 114.5 million in pcp, partially offset by higher cost of material.
• Huge increase in net income: In Q1 2022, the company reported net income of CAD 98.7 million against CAD 80.6 million in pcp, partially offset by higher income tax expense.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 20.24% of the total shareholding. BlackRock Institutional Trust Company and The Vanguard Group, Inc. hold the company's maximum interests at 2.84% and 2.79%, respectively. The company's institutional ownership stood at 31.18%.

Valuation Methodology (Illustrative): EV to Sales based

Stock recommendation

Steel market dynamics improved dramatically late in the first quarter of 2022. Improved pricing and activity in both Canada and the United States enabled the company to garner more revenues as the oil market continued to revive. Furthermore, steel demand is expected to increase further through 2022 due to a comeback in non-residential construction, infrastructure projects, and general manufacturing activity. We assume that this will help the company's future growth.

The company sells a broad variety of steel and other metal products, including structural, plate, flanges, flat rolled, and pipes. This is noteworthy since it reduces reliance on each part. Furthermore, it has long-standing links with North American steel companies and is the region's biggest steel importer. Furthermore, the company offers a healthy dividend yield of 4.94%, which is outstanding given the current interest rate environment.

Hence, considering all above discussed rationales we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 30.75 as on June 9, 2022. Additionally, the 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 June 9, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on June 10, 2022, price as well. 

Technical Analysis Summary

Disclaimer

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