Stelco Holdings Inc.

Stelco Holdings Inc. (TSX: STLC) is a steel company and is engaged in the production and selling of steel products to customers in the construction, automotive, appliance and energy, pipe and tube industries in North America.

Q2FY20 Financial Highlights: STLC announced its quarterly results wherein the company posted revenue of CAD 411 million as compared to CAD 427 million in the previous corresponding quarter. The marginal decline was primarily attributable to a 7% y-o-y decrease in average selling prices and lower non-steel sales, partially offset by 6% higher steel shipping volumes. The average selling price of steel products stood at CAD 700/nt as compared to CAD 754/nt in the previous corresponding period (pcp), due to a decrease in market prices for flat steel products. However, the company reported a higher shipping volume at 576 thousand nt, up from 545 thousand nt in Q2FY19. Operating income grew to CAD 16 million from CAD 3 million in pcp, driven by higher gross profit. Adjusted EBITDA increased to CAD 34 million, representing a growth of 6% on y-o-y basis. The quarter was marked by a higher finance cost, due to remeasurement impact from the employee benefit commitment and an increase in interest on loans and borrowings, partially offset by a lower accretion expense related with the employee benefit commitment obligation. The company ended the quarter with a cash balance of CAD 168 million, while total assets stood at CAD 1,605 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks:  The company’s revenue is directly related to the demand and prices of steel and any fluctuation in commodity prices or a decline in demand would impact the group’s financial performance.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock declined ~15% on a year to date basis, amid volatility in the equity market on account of COVID-19 pandemic. Despite a challenging macro scenario, the Company reported an improved performance, which is commendable. The Company has ample liquidity with cash and cash equivalent of CAD 168 million and a borrowing capacity of CAD 105 million, which seems to be sufficient enough to cater to the near-term working capital requirement.  The Company has successfully increased its penetration in downstream, value-added markets and, as planned in the last quarter, which helped the Company to secure long-term supply of competitively priced high-quality iron ore as well as an option to purchase a 25% ownership interest in the Minntac Mine. This augurs well for future business prospects. Further, the group remains one of the lowest-cost integrated producers across North America, and the Company would have the upper hand as it completed its blast furnace project. Going forward, we expect demand to increase as industrial and manufacturing activities are coming back on track, which in turn would support the steel prices. We have valued the stock using 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 SunCoke Energy Inc, Warrior Met Coal Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 9.22 on August 27, 2020.

STLC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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