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

• Robust FY2021 performance: The company reported robust performance in the FY 2021, with revenue surged by 57% to CAD 4,209 million, against CAD 2,688 million on a YoY basis, EBITDA increased to CAD 664 million, against CAD 125 million and net income rose by 1,628% to CAD 432 million compared to CAD 25 million in the previous corresponding period.

Source: Company Filing

• Sequentially Improving Profitability: Despite the turmoil period in 2020, the Company maintained its pace and witnessed spirited performance across its gross margin, EBITDA margin, operating margin and net margin. We believe the momentum to continue in the foreseeable future, as the demand for the commodity is expected to continue to improve into 2022 as a result of a recovery in various infrastructure activities. Furthermore, it would also support future growth of the company.

Source: REFINITIV, Analysis by Kalkine Group

• Industry beating margins: Despite the second wave of the Covid-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in FY 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 

Source: REFINITIV, Analysis by Kalkine Group

• 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 666.6 million in FY 2021, which helped the company to report elevated free cash flows of CAD 609.7 million compared to CAD 94.3 million in pcp.

Source: Company Filing

• Steel demand getting bigger: Steel demand is predicted to grow further until 2022 as a consequence of a rebound in non-residential development, infrastructure projects, and general manufacturing activity. As a result, we anticipate a favourable supply and demand balance in 2022, despite the fact that steel prices will remain unpredictable. The rebound in oil and natural gas prices, as well as increased capital investment plans by energy companies, are projected to boost activity in the energy industry.

• Improving Steel prices: Steel markets were quite robust throughout the most of FY 2021, thanks to high demand and limited supply. Prices grew throughout the year and are expected to continue far above historical levels in the fourth quarter of 2021. In 2021, the company's metals service centres had a 62% rise in selling price per ton compared to 2020, and same store tons shipped increased 5% compared to 2020. Steel distributors also saw a rise in demand and selling prices.

• Stabilizing Inventory: Since the industry's acute supply issues in mid-2021, steel availability has recovered and inventories in the supply chain has grown. We expect availability to increase further in 2022, albeit there will be some continued limits owing to COVID-related personnel and transportation concerns. Both Canada and the United States have seen an improvement.

Source: Company Presentation

• Acquired Boyd Metals: On November 30, 2021, the company acquired a group of companies that operate as Boyd Metals. Boyd is a full line metals service centre that operates in five locations in the U.S. We believe the acquisition of Boyd has expanded the company’s metals service centre presence in the Southern and Midwest U.S., and also complements the existing operations in the region, the transaction was immediately accretive to earnings and enhances its return on capital.
  

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 FY 2021

 

Source: Company Filing 

• Higher revenue: In FY 2021, the company generate revenue of CAD 4,208.5 million, increased 57% against CAD 2,688.3 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 centers and steel distributors segments.
• Elevated operating income: On the back of higher revenue and lower cost of sales in the reported period the company clocked elevated operating income of CAD 606.1 million compared to CAD 64.6 million in pcp.
• Huge increase in net income: In FY 2021, the company reported net income of CAD 432.2 million against CAD 24.5 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 19.68% of the total shareholding. BlackRock Institutional Trust Company and The Vanguard Group, Inc. hold the company's maximum interests at 3.04% and 2.84%, respectively. The company's institutional ownership stood at 30.78%. 

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Analysis by Kalkine Group 

Stock recommendation

Steel markets were quite robust throughout the majority of 2021 due to high demand and limited supply. Prices increased throughout the year and were substantially above historical levels in the fourth quarter of 2021. Furthermore, the company reported strong Q4 FY2021 and full year 2021 financial results, with its top and bottom lines expanding substantially, thanks to a strong steel price environment and strong demand in the metals service centers and steel distributors segments, as well as an improvement in energy activity. In FY 2021, the company generated CAD 609.7 million in free cash flow. Contributions from Boyd Metals, which the business just bought, were also included in Q4.

Steel demand is likely to rise further through FY2022, owing to increased activity in non-residential building, infrastructure projects, and general manufacturing. We believe this would support the company in its future growth. Furthermore, the firm has demonstrated its resiliency by sequentially strengthening its operational matrix. Even in FY 2021, it outperforms the industry median margin on numerous fronts, demonstrating the company's competitive edge. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the at the closing price of CAD 32.00 as on March 3, 2022.

One-Year Technical Price Chart (as on March 3, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

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