-
Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
* Employed by a non-US affiliate of Santander Investment
Securities Inc. and is not registered/qualified as a research
analyst under FINRA rules.
Latin American Equity Research Company Report
Buenos Aires, September 11, 2012 LatAmMetal and Mining
TERNIUM BUYSolid Fundamentals to Outweigh Short-Term Uncertainty
Walter Chiarvesio* Eugenia Fernandez Pouchan*Santander Rio Sociedad
de Bolsa S.A. Santander Rio Sociedad de Bolsa S.A.+5411 4341-1564
+5411 [email protected]
[email protected]
(9/11/12) CURRENT PRICE: US$19.60 TARGET PRICE: US$25.80 Whats
Changed Rating Maintain Buy Target Price (US$) Introducing YE13:
25.80 EBITDA Estimates (US$ Mn) 12 to 1,385 from 1,592 13 to 1,413
from 1,589 14 Introducing 1,544
Company Statistics Bloomberg TX52-Week Range (US$)
15.10-25.402013E P/E Rel to the MSCI LatAm (x) 0.72013E P/E Rel to
M&M (x) 0.9MSCI (points) 3,633.03-Yr EBITDA CAGR (12-15E)
6.0%Market Capitalization (US$ Mn) 3,922.0Float (%) 24.43-Mth Avg
Daily Vol (US$ Mn)) 9.7Shares Outst Mn (ADS: 10:1) 200.5Net
Debt/Equity (x) 0.4Book Value per ADS (US$) 28.1
Estimates and Valuation Ratios 2011 2012E 2013E 2014E Net Earn
(Local Mn) NA NA NA NA Current EPS NA NA NA NA Net Earn (US$ Mn)
514 64 510 571 Current EPADS 2.6 0.3 2.5 2.9 P/E (x) 7.6 61.7 7.7
6.9 P/Sales (x) 0.4 0.5 0.5 0.5 P/CE (x) 4.3 8.9 4.2 3.9 FV/EBITDA
(x) 4.0 4.9 4.8 4.4 FV/Sales (x) 0.7 0.8 0.8 0.8 FCF Yield (%) 1.2
-6.3 4.3 16.9 Div per ADS (US$) 0.73 0.73 0.75 0.76 Div Yield (%)
3.7 3.7 3.8 3.9 NA: Not available. Sources: Bloomberg, company
reports, and Santander estimates.
Investment Thesis: Terniums solid medium-term fundamentals
should outweigh short-term concerns about the steel sector, and
should lay the groundwork for a 6.0% EBITDA CAGR for 2012-15.
Although we do not expect short-term catalysts for the stock, we
believe that investors should add to their positions over the next
six months. We believe that Ternium is a good vehicle for investors
to participate in the LatAm steel sector, based on the following
value drivers: Capacity expansion focused on higher-end products.
An increase in CRC and galvanizing capacity in Mexico should allow
TX to deplete its spare capacity in HRC lines, leading to an
improved product mix, and to increased value-added spreads. We
estimate this could be reflected in at least a 4% increase in TXs
revenue/tonne after 2013. This should partially offset our lower
reference price for steel (HRC U.S.), which we expect to decline 8%
and 11% in 2012 and 2013, respectively. Volume growth: positive in
North America, cautious in South America. In addition to an
improvement in Terniums value-added mix, we expect total shipments
in Mexico to continue to grow 3% annually through 2015. However, in
South America, we expect a 10% decline in 2012, a flat 2013, and a
resumption of growth in 2014 of 2%. Operating flexibility. DRI/EAF
technology and a slab deficit in an excess crude steel supply
scenario provides Ternium with lower operating leverage to shore up
declining margins in the short term. At the same time, TX should
continue to access natural gas at low relative cost in Mexico
(US$3-4/Mbtu), which compares positively with coal above
US$200/tonne for blast furnace facilities. Reasons for change to
price target. We are introducing our YE2013 target price of
US$25.80, replacing our US$32.10 YE2012 target price, based on (1)
lower short-term earnings estimates following lower global steel
prices and a more conservative growth outlook in South America, (2)
lower short-term margins in Argentine operations due to increasing
regional exports at higher costs, (3) lower weight of Usiminas in
our NAV due to a lower target price for YE2013 than for YE2012, and
(4) higher country risk in Argentina. Our EBITDA estimates for 2012
to 2015 are 3% to 7% below consensus. However, we maintain our Buy
rating, suggesting 35.5% total-return potential.
Valuation and Risks: Our YE2013 target price is based on a DCF
model, with WACC of 10.7% and perpetuity growth of 2.5%. Risks
include poor global and regional economic growth, lower steel
prices, higher raw material costs, and political risk.
-
Ternium: Solid Fundamentals to Outweigh Short-Term
Uncertainty
2 Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
Ternium is one of the main steel producers in LatAm, with
manufacturing facilities in Argentina (Siderar) and Mexico (Hylsa
and IMSA). It has total crude steel and rolling capacity of
approximately 7.0 million and 9.95 million tonnes per year,
respectively. In 2011, 85% of the companys revenue was related to
flat steel products, including cold-rolled coils and sheets, tin,
galvanized and electro-galvanized sheets, prepainted sheets, and
tailor-made flat products. It also produces long steel products,
such as bars and wire rod, which represented 15% of the companys
total revenue in 2011. In January 2012, Ternium acquired 115
million ordinary shares of Usiminas, giving it a 17% economic stake
in the company and 10% direct and indirect participation on the
voting shares. The Techint Group is the largest shareholder in
Ternium, with a 62% stake, followed by Tenaris with an 11% share,
2% are in the Treasury, and the remaining 24% floats in the New
York Stock Exchange. The company was incorporated in
Luxembourg.
INVESTMENT THESIS Long-term positives outweigh short-term risks.
Our Buy rating is predicated first, on the companys consolidated
and expanding position in the Mexican steel market, which has
attractive growth potential; second, on the companys flexible
technology based on Direct Reduced Iron (DRI)/Electric Arc Furnace
(EAF) usage and lower operating leverage provided by its flat crude
steel deficit that would allow the company to better weather a
potential global economic disruption affecting the cyclical steel
sector; and third, on TXs access to lower-than-average energy costs
(for natural gas and electricity) in North America. We believe that
these medium- to long-term positive drivers offset short-term
concerns about the global economic outlook, industry oversupply,
and global steel prices, as well as the deceleration of steel
demand in Argentina fueled by the economic slowdown that affects
the South American operations. Finally, we note that the recent
target price change for Usiminas (our analyst Felipe Reis
introduced the YE2013 target price of R$7.00 for preferred shares,
USIM5) also negatively affected our NAV assessment even after
accounting for a 35% controlling premium, to reach a value of
BRL9.45/ON USIM3. (Please refer to our September 10 report,
Usiminas: Improving Performance Ahead Doesnt Mean an Attractive
Stock.)
MAIN VALUE DRIVERS Capacity expansion should allow TX to
increase value-added spreads beyond 2013. TX is proceeding with its
cold rolling capacity (CRC) expansion at Pesquera of 1.5 million
tonnes, which it expects to start up in 3Q13. We estimate that once
production begins, the new facility will allow sales volume in the
North American (NA) region to increase the depletion of its flat
steel hot rolling capacity (HRC), which is currently working at
less than 70%. Moreover, we think that TX will be able to improve
its mix of steel products toward higher-value-added steel, from 50%
HRC/50% CRC to 25% HRC/75% CRC, implying reported average revenue
per tonne improvement of 4%, or roughly US$40-50/tonne, according
to our estimate. In addition, the company is also expanding its
galvanizing capacity by 400,000 tonnes, in association with Nippon
Steel, to supply the automotive industrys specific requirements,
which should also improve Terniums products mix.
Operating flexibility in a weak demand environment. DRI/EAF
technology in the NA region gives Ternium more operating
flexibility, in our view, during economic slowdown periods than
does blast furnace (BF) and basic oxygen furnace (BOF)
technologies. TXs crude steel capacity based on the former
technology is 58% of the total, including flat and long steel in
Mexico (world steel production in 2011 was DRI 4% and EAF 29%,
according to the World Steel Association). We also believe that the
crude steel deficit becomes an advantage under an excess supply
scenario.
-
Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
3
Low energy cost in North America should continue to benefit
Ternium. DRI is fed with natural gas that is currently priced at
low levels in NA following the increasing development of
nonconventional (shale) gas in the U.S. Although the recent price
below US$3/MBtu is presumably driven by short-term effects, we
think that the NA region will enjoy natural gas prices that are
lower than those for other regions. Our model assumes that natural
gas prices (U.S. referenceHenry Hub) will reach a steady
US$4.00/MBtu in 2014. A sensitivity analysis suggests that a
US$1.00 increase in natural gas prices in 2013-17 implies US$55
million lower EBITDA and a 0.60% lower margin in 2012.
Positives Concerns
70% of Installed capacity located in Mexico, on which we have a
positive economic outlook.
Expansion capacity focused in downstream value-added projects
should allow TX to sustain price premiums for its products.
Flexible technology (DRI/EAF vs. BF/BOF) to cut production in a
worse-than-expected economic scenario.
Access to competitive energy costs, mainly natural gas.
Partial hedge of raw material costs: slab deficit in an excess
supply scenario; iron ore mines in tight market conditions.
Uncertain outlook of global and U.S. steel prices. Sector
cyclicality in current uncertain global
economic environment.
Slowing growth and tighter margins in South America.
MODEL ASSUMPTIONS Volume growth (Figure 1), positive in North
America (NA), cautious in South America (SA):
1) In Mexico, we expect steel demand to remain strong, backed by
an economy that we expect to grow 3.8% and 3.6% in 2012 and 2013,
respectively, according to our economic teams forecast. We expect
flat steel volume in NA to show a three-year CAGR of 3.0% in
2012-15, in-line with 1H12 growth. In the long run, we think that
TXs low-utilization HRC capacity and previously mentioned
downstream expansion will allow the company to meet growing demand
over the next ten years, for which we assume a long-term annual
growth rate of 2.5%.
2) SA partially sustained by regional exports at lower margins
in the short term. In SA, we expect volume to decline around 10% in
2012 (1H12 was down 8.6% YoY) due to a deterioration of economic
activity in Argentina, and to remain flat until 2015. The economic
slowdown in Argentina is hurting local steel demand, mainly from a
setback in the automotive industry and construction, in our view,
which together account for 60% of Terniums Siderar demand. Although
the consensus economic outlook for 2013 is mildly positive, relying
mainly on Brazils economic and agricultural sector recovery, we
think that there is a significant risk for this outlook not meeting
expectations. Ternium expects to offset lower demand in Argentina
with regional exports but at the expense of higher operating costs
(upfront export taxes of 5% and freight) and consequently lower
margins. Argentine Siderars 2Q12 has signaled this trend, posting
exports of 89,000 tonnes (12% of total shipments) compared with an
average of 36,000 tonnes (7% of total shipments) during the
previous four quarters, at the same time that local volume sales
declined 13% YoY.
3) For the long steel segment we expect volume to grow 7% in
2012 and 2% annually until 2015, reaching full capacity utilization
by that time considering both regions.
-
Ternium: Solid Fundamentals to Outweigh Short-Term
Uncertainty
4 Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
Figure 1. Volume AssumptionsFlat (l)/Long (r) (Million
Tonnes)
Sources: Santander and company reports.
Global steel reference prices on a downward trend. Our model
uses a path of international reference prices (hot rolled coils in
the U.S. for flat steel, billet in LatAm for long steel) and a path
for spreads to reach average revenue per tonne relevant to Ternium.
Our model reflects a conservative outlook for steel prices, which
are 13% lower, on average, than our previous assumptions for
2012-15, based on:
1) Concerns about the global economy. PMI indicators are not yet
showing convincing signals of economic growth; particularly in
China, which accounts for 45% of global steel demand; and credit
event risk in Europe may threaten global financial stability.
2) Deceleration of Chinas steel consumption. Chinese steel
consumption per capita reached 460kg/inhabitant in 2011, a CAGR of
9.6% in 2005-2011, but +6.0% in 2011, according to the World Steel
Association. During the first seven months of the year, we estimate
that apparent crude steel consumption in China slowed further to
1.0% YoY.
3) Crude steel oversupply concerns in a context of weakening
demand growth.
Regarding spreads, we think that TX will be able to improve
premiums, mainly in NA, based on the previously mentioned capacity
expansion to improve its product mix in terms of value added, which
should start being reflected in 2H13 results.
Figure 2. Average Revenue and Spreads per Tonne (USD/Tonne)Flat
(l)/Long (r)
Source: Santander, company reports.
Ternium should be better positioned in an oversupplied steel
market. Although an excess of crude steel supply may exert downward
pressure on prices across the steel value chain, we think that
Terniums exposure to the higher-end products market (CRC,
galvanized, etc.) and slab deficit provides lower operating
leverage in such a context. We think that Terniums pricing power is
more local-market driven by its meeting specific requirements of
local clients, thus providing a barrier to entry. Recent trends in
steel and raw
3.5 4.4
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2005
2007
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2015
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2019
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2021
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2023
E
South&Central America North America
0.7 0.
9 1.3
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2005
2007
2009
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2013
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E
South & Central America North America
587
613
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498 62
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HRC US Local Spread
333
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2005
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2021
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2023
E
Billet LatAm Local Spread
-
Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
5
material prices have been benefiting TX, preventing further
margin contraction, with U.S. HRC prices outperforming TX raw
materials such as slab, iron ore, and, to lesser extent, scrap (see
Figure 3).
Figure 3. HRC Steel and Raw Material Price RatiosRelevant for
Ternium*
*Assuming iron ore need of 1.5x. Sources: Santander and
Bloomberg.
In sum, we still expect margins to compress in 2012, to be flat
in 2013, and to recover thereafter. Based on our price, volume, and
cost dynamic assumptions, we expect EBITDA/tonne to remain flat
until next year and to recover in 2014 to an average of
US$176/tonne for the following ten-year window. Likewise, we expect
margins to recover to an 18% average and remain near that level
after 2014.
Figure 4. Model implied Operating Metrics
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
CAGR 2012-2015
Sales Volume (Mn tonne) 8.17 6.36 8.05 8.82 8.70 8.85 9.07 9.33
9.55 2.4% Average Revenue/Tonne (US$) 1,061 758 895 1,021 966 915
925 925 905 -1.5% Total Revenues (US$ Bn) 8.96 4.96 7.38 9.14 8.48
8.17 8.46 8.71 8.72 0.9% Cash Costs per Tonne (US$) 746 595 664 765
726 672 673 667 656 -2.8% EBITDA per Tonne (US$) 274 107 178 189
159 160 170 177 169 3.5% EBITDA (US$ Bn) 2.24 0.68 1.44 1.67 1.39
1.41 1.54 1.65 1.62 6.0% EBITDA Margin 25.0% 13.7% 19.5% 18.2%
16.3% 17.3% 18.3% 18.9% 18.6% NM Net Debt/EBITDA 0.94 0.27 (0.48)
(0.27) 1.69 1.64 1.17 0.73 0.36 NM
Sources: Santander and Bloomberg. NM: Not meaningful.
CAPEX, LEVERAGE, AND CASH FLOW Following TXs guidance, we assume
total capex of US$1.0 billion in 2012, US$700 million in 2013, and
US$350 million per year thereafter. According to the company
(20F-2011), TX is focused on downstream expansion and on revamping
project facilities in the amount of US$1.7 billion in 2011-13. The
most significant projects in our view follow.
1) Cold rolled coil expansion, Mexico. +1.5 million tonnes:
US$700 million, or US$470/tonne. Start-up expected in 3Q13. This
expansion leads CRC capacity in Mexico to 4.0 million tonnes. Our
model assumes that TXs current volume mix of 50% HRC + 50% CRC
improves to 25% HRC + 75% CRC, based on installed capacity
utilization of 80% in the CRC line.
2) Tenigal, Mexico. In partnership with Nippon Steel: 400,000
tonnes of galvanized steel for the automotive industry; US$350
million, or US$875/tonne. Start-up expected in 3Q13. The facility
is expected to be fed with 200,000 tonnes of ultra low-carbon steel
produced by Nippon in Mexico, and the remaining capacity is
expected to be fed by TXs own line of CRC.
0.00
0.50
1.00
1.50
2.00
J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12
HRC US/SLAB
0
1
2
3
4
J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12
HRC US/SCRAP US
-
Ternium: Solid Fundamentals to Outweigh Short-Term
Uncertainty
6 Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
3) Continues casting line (slab) expansion, Argentina. +500,000
tonnes, for a total cost of US$180 million, or US$360/tonne.
Start-up expected in 2013. This line will narrow Terniums slab
deficit at aggregated levels, but implies a surplus of 450,000
tonnes in Argentina that offsets the deficit in Mexico, which we
estimate to be normally 2.5 million tonnes. For modeling purposes,
we assume that the new slab capacity will be dispatched to
Mexico.
4) Hot rolled coil expansion, Argentina. New coiler to add
100,000 tonnes at a total cost of US$80 million, or US$800/tonne.
Start-up expected in 2013.
5) Vacuum degassing facility, Argentina. New ultra low carbon
steel capacity of 1.2 million tonnes to meet automotive industry
requirements. Total investment of US$50 million, or US$42/tonne.
Expected for 2Q13.
Figure 5. Ternium Installed Capacity Break-Up (Thousand
Tonnes)
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E CAGR 20122015E
Slabs 5,000 5,000 5,000 5,000 5,200 5,450 5,700 5,700 5,700 3.1%
Billets 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 0.0%
Total Crude Steel Capacity 6,800 6,800 6,800 6,800 7,000 7,250
7,500 7,500 7,500 2.3% Argentina (Flat Steel) 2,850 2,850 2,850
2,850 2,850 2,950 2,950 2,950 2,950 1.2% Mexico (Flat+Long Steel)
6,800 6,800 6,800 6,800 7,100 7,100 7,100 7,100 7,100 0.0% Total
Rolling Steel Capacity 9,650 9,650 9,650 9,650 9,950 10,050 10,050
10,050 10,050 0.3% Hot rolled Coils 8,550 8,550 8,550 8,550 8,850
8,950 8,950 8,950 8,950 0.4% Cold rolled Coils 4,300 4,300 4,300
4,300 4,300 5,800 5,800 5,800 5,800 10.5% Coating 2,900 2,900 3,500
3,500 3,640 3,940 3,940 3,940 3,940 2.7% Rebars & Wire Rods
1,100 1,100 1,300 1,300 1,300 1,300 1,300 1,300 1,300 0.0%
Sources: Company presentations as of August 2012 and Santander
estimates.
Azu project unlikely to advance in the short term. After the
purchase of the stake in Usiminas, TX said it changed the project,
originally based on BF/BOF, to DRI/EAF technology. TX would need to
assure the provision of natural gas at reasonable costs and iron
ore, to feed the facilities. We think that this project will be
suspended for a while until conditions are met, and we do not
include it in our model.
Usiminas: TX has not provided a full explanation about how
synergies might benefit Ternium, so we conservatively exclude such
assumptions in our model. Thus, the impact on our target price
would stem from the value on the NAV. Considering our YE2013 target
price of US$3.33 for USIM5 (R$7.00 and FX of R$2.10/US$) and a 35%
premium on the ordinary USIM3, we reach a value of US$518 in TXs
NAV (6% of TXs NAV, or US$2.58/ADS). Despite our constructive view
on the ability of TXs management to turn around Usiminas, based on
its experience in other countries, our analyst in Brazil, Felipe
Reis continues to have a cautious view on the company and the steel
sector in Brazil. In any case, in-line with the companys view, we
think that the impact will not be visible in the short term and
that it remains a long-term call. (Please refer to our September 10
report, Usiminas: Improving Performance Ahead Doesnt Mean an
Attractive Stock.)
Leverage at reasonable levels. TXs net debt amounted to US$2.05
billion, from a previous positive cash position due to the
acquisition of 115 ordinary shares in Usiminas (80 million shares
by TX and 25 million by Siderar), implying 1.69x estimated net
debt/EBITDA in 2012E. Terniums cash distribution follows: (1)
Ternium Mexico holds US$221 million in cash, with net debt of
US$1.34 billion; (2) Siderar holds US$116 million in cash, with net
debt of US$400 million; thus, we estimate that TX holds cash of
US$150 million and net debt of US$316 million at the holding level.
Our model reflects that under current assumptions, TX would take
around five years to be net cash positive again.
-
Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
7
EARNINGS REVISIONS Our downward earnings revision is due mainly
to a more conservative outlook on global steel prices and volume
sales in South America, with lower margins due to exports from
Argentina to neighboring countries.
We believe that 2H12 will not bring positive earnings surprises,
in-line with TXs guidance for 3Q12. The company guided for flat
volume and slightly declining steel prices in 3Q12, which are
already materializing in reference prices. In addition, we think
that declining raw material costs recently observed (through iron
ore and coal prices) will not be manifested before 1Q13 due to
contract structures and accounting practices.
Our bottom-line estimate for 2012 has dropped steeply, as we
assume impairment on the Usiminas stake book value. The magnitude
of this impact is difficult to predict but it is purely an
accounting change that has no impact on cash flow and taxes. We
assume, for modeling purposes, an impairment of US$500 million
materializing in 4Q12. Figure 6. TerniumEstimate Revisions,
2012E2014E (U.S. Dollars in Millions*)
2012E 2013E 2014E Previous Current Change Previous Current
Change Previous Current Change
Revenue 9,043 8,480 -6.2% 9,256 8,174 -11.7% 8,462 Op. Profit
1,195 1,016 -15.0% 1,164 999 -14.2% 1,104 EBITDA 1,592 1,385 -13.0%
1,589 1,413 -11.1% 1,544 EBITDA Margin 17.6% 16.3% -127 bps 17.2%
17.3% 12 bps 18.3% Net Income 656 64 -90.3% 603 510 -15.4% 571
EPADS 3.30 0.30 -90.3% 3.00 2.50 -15.4% 2.90 *Except per share
data. Sources: Company reports and Santander estimates.
VALUATION Despite our conservative short-term outlook, we rate
Ternium Buy based on its 35.5% total-return potential, including a
dividend yield of 3.8%, according to our DCF analysis for TXs cash
flow, and a value of US$518 million for TXs stake in Usiminas, as
shown in Figure 7. Our Buy threshold for TX is 27.6% based on the
location of its installed capacities in Argentina and Mexico and a
weighted average of the respective country risk metrics.
-
Ternium: Solid Fundamentals to Outweigh Short-Term
Uncertainty
8 Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
Figure 7. TerniumDCF and WACC Estimates (U.S. Dollars in
Millions*)
WACC Calculation 2013E Risk free rate (U.S. 10-yr. yield)
2.0%
Country risk 5.2%
Expected return over risk free rate 5.5%
Beta 1.05
Cost of equity 13.0%
% equity 70%
Pre-tax cost of debt 8.0%
Cost of debt 5.2%
% debt 30%
WACC 10.7%
Perpetuity 2.5%
Discounted Cash Flow 2014E 2015E 2016E 2017E 2018E 2019E 2020E
2021E 2022E 2023E Operating Income 1,104 1,217 1,193 1,249 1,279
1,238 1,234 1,250 1,302 1,310 (-) Taxes on Operating Income -386
-426 -417 -437 -448 -433 -432 -438 -456 -458 (+) Depreciation 440
432 425 418 412 406 401 396 392 388 (+/-) Changes in Working
Capital -117 -95 -47 -85 -79 -28 -85 -63 -95 -61 (-) Capital
Expenditures -350 -350 -350 -350 -350 -350 -350 -350 -350 -350 (=)
Free Cash Flow 691 779 802 795 814 832 768 795 793 828 Discount
Factor 0.90 0.82 0.74 0.67 0.60 0.54 0.49 0.44 0.40 0.36 Discounted
Free Cash Flow 624 636 592 530 490 453 378 353 319 300 (=) 2013E
Year-End Value DCF 4,675 (+) Perpetuity (2.5%) 3,405 (-) Net Debt
2013E 2,321
(+) Stake in Usiminas 518
(-) Minority Interest 1,096
(=) Firm Value 8,598
(=) 2013E Year-End Equity 5,180
2013E Year-End Equity per ADS $25.80
Sources: Company reports and Santander estimates.
However, on market valuation, we recognize that TX might be
fairly valued. We understand that TX should trade at a discount to
its market peers, but finding the fair discount is a delicate
process. On one hand, multiples are around historical averages, the
discount is close to historical highs on a forward P/E basis, but
with room to increase on forward FV/EBITDA terms, according to
market consensus. On the other hand, after the nationalization of
YPF in Argentina, investors perception of risk has increased
discounts on Argentine stocks to around 70-80% against LatAm peers,
which should be translated in discount to TX. If we consider TXs
exposure in Argentina based on facilities location and EBITDA
generation, the discount should be 21-24% (30% share on 70-80%
discount = 21-24%) assuming no premium on Mexican facilities, which
we think is conservative due to our positive view on the Mexican
steel market growth potential. However, if we adjust by property
stakes on EBITDA, the weight in Argentina is close to 50% (given
that Siderar has a 30% stake in TX Mexico); thus, the discount
should be 35% given no premium/discount on Mexico.
-
Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
9
Based on our earnings estimates, TX is trading at 4.8x FV/EBITDA
for 2013E while it should reach 5.8x considering our target
price.
Figure 8. Ternium Valuation vs. LatAm PeersFV/EBITDA
Figure 9. Ternium Valuation vs. LatAm PeersPE
Source: Santander estimates based on Bloomberg consensus.
Figure 10. Industry Comps
Ticker Company Stock Price Mkt Cap EV/EBITDA P/E
STEEL BRAZIL 2012E 2013E 2014E 2012E 2013E 2014ECSNA3 CSN 5.16
7,526 7.7 6.4 6.3 NM 8.3 7.9
GGBR4 Gerdau 9.45 15,123 8.8 7.6 7.3 16.4 14.3 13.9
USIM5 Usiminas 4.73 4,669 14.8 8.8 7.7 NM 42.6 21.9
BRAZIL AVERAGE 10.4 7.6 7.1 16.4 21.7 14.6
STEEL - AMERICAS X US USSteel 21.16 3,053 5.4 4.0 3.3 16.6 6.9
5.1
TX Ternium 19.60 3,869 4.9 4.8 4.4 61.7 7.7 6.9
NUE US Nucor 39.31 12,479 8.9 6.2 5.0 21.7 12.0 9.4
STLD US Steel Dynamics 12.29 2,694 6.9 5.1 4.5 14.2 8.4 6.4
CAP CI CAP 35.89 5,363 7.3 6.6 5.5 13.0 12.0 10.1
ICHB MM ICH 5.63 2,451 5.2 5.0 4.5 10.3 11.0 11.9
AMERICAS AVERAGE 6.6 5.4 4.7 22.6 9.6 8.2 NM: Not meaningful.
Priced as of 9/7/12; all prices and estimates in US$. Sources:
Santander estimates and Bloomberg consensus.
0.01.02.03.04.05.06.07.08.09.0
10.0
M-0
6
S-06
M-0
7
S-07
M-0
8
S-08
M-0
9
S-09
M-1
0
S-10
M-1
1
S-11
M-1
2
TX US Market Cap Weighted Average
0%
10%
20%
30%
40%
50%
60%
70%
80%
M-0
6
A-0
6
J-07
J-07
N-0
7
A-0
8
S-08
F-09
J-09
D-0
9
M-1
0
O-1
0
M-1
1
A-1
1
J-12
J-12
Discount FV/EBITDA
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
M-0
6
S-06
M-0
7
S-07
M-0
8
S-08
M-0
9
S-09
M-1
0
S-10
M-1
1
S-11
M-1
2
TX US Market Cap Weighted Average
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
M-0
6
A-0
6
J-07
J-07
N-0
7
A-0
8
S-08
F-09
J-09
D-0
9
M-1
0
O-1
0
M-1
1
A-1
1
J-12
J-12
Discount PE
-
Ternium: Solid Fundamentals to Outweigh Short-Term
Uncertainty
10 Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
RISKS Economic risk. Ternium is directly exposed to Mexican
macroeconomic risk and indirectly
exposed to U.S. economic risk. If economic expectations fail to
be met in the North American region, the companys operations and
profitability could be severely affected. On the other hand, 30% of
the companys EBITDA is generated in Argentina; although we
incorporated a conservative outlook on Argentina, worsening
conditions could also affect our target price for the stock.
Global steel prices. TX has integrated operations in Mexico and
Argentina with particular pricing powers in each region. However, a
tougher-than-expected global economic slowdown or disruption could
affect global reference prices of steel; thus, TXs profitability
could be affected. In addition, the steel industry faces short term
uncertainties regarding the supply-demand balance. If oversupply
holds in a demand slowing scenario, steel prices could be affected
more-than-expected.
Raw material prices. The recent drop in metal prices affected
steel and raw materials used by TX in production, which avoided
further margin deterioration; if this trend changed with steel
prices falling more than raw material prices, TXs profitability
would be hurt.
Political risk. We are not considering a scenario in which TXs
facilities in Argentina become nationalized, as happened with YPF
early this year, as we think that such a possibility is low. While
we think the stock valuation fairly reflects that risk, if a
takeover were to occur, the stock price performance could be
severely affected.
-
Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
11
FINANCIAL STATEMENTS Figure 11. TerniumIncome Statement, Balance
Sheet, and Cash Flow Statement, 20092015E (U.S. Dollars in
Millions) Income Statement 2009 2010 2011A 2012E 2013E 2014E 2015E
Net sales 4,959 7,381 9,157 8,480 8,174 8,462 8,660 Cost of sales
(4,110) (5,665) (7,094) (6,662) (6,374) (6,549) (6,674) Gross
profit 849 1,716 2,063 1,817 1,800 1,913 1,985 SG&A expenses
(532) (665) (786) (807) (801) (804) (823) Other operating income,
net (21) 3 (12) 6 0 0 0 Operating income 296 1,053 1,265 1,016 999
1,109 1,163 EBITDA 681 1,437 1,671 1,385 1,413 1,549 1,595
Financial results 92 46 (312) (101) (105) (102) (69) Goodwill 469
61 11 (505) 0 0 0 Equity income 1 26 1 (5) 0 0 0 Pretax profits 858
1,186 966 405 894 1,007 1,094 Income tax (91) (407) (315) (301)
(295) (332) (361) Effective Tax Rate 0 0 0 1 0 0 0 Minority
interest (50) (157) (136) (40) (89) (101) (109) Net income 717 622
514 64 510 574 623 Balance Sheet 2009 2010 2011 2012E 2013E 2014E
2015E Cash & cash equivalents 2,143 2,628 2,441 205 324 740
1,109 Trade receivables 438 664 735 777 761 788 807 Inventories
1,351 1,953 2,137 2,074 2,096 2,189 2,267 Other 1,102 278 241 454
459 463 468 Current Assets 5,033 5,523 5,554 3,511 3,639 4,180
4,651 Fixed assets 4,040 4,263 4,033 4,526 4,812 4,721 4,639
Non-Consolidated Companies 0 0 0 2,065 1,560 1,560 1,560 Other
1,219 1,327 1,149 1,073 1,008 947 890 Non Current Assets 5,259
5,589 5,182 7,664 7,379 7,228 7,089 Total Assets 10,293 11,112
10,736 11,175 11,018 11,408 11,740 Short-Term Debt 540 513 1,042
1,071 1,071 1,071 971 Trade payables 413 588 678 614 524 538 549
Other liabilities 206 454 251 222 212 219 220 Current Liabilities
1,159 1,556 1,971 1,907 1,807 1,828 1,739 Long-Term debt 1,787
1,427 949 1,474 1,574 1,474 1,374 Deferred income tax 857 878 749
723 736 730 733 Other liabilities 228 236 237 250 238 240 241
Non-Current Liabilities 2,873 2,541 1,935 2,447 2,548 2,444 2,348
Total Liabilities 4,032 4,096 3,906 4,354 4,355 4,272 4,088
Minority interest 965 1,135 1,085 1,096 1,096 1,096 1,096 Equity
5,296 5,881 5,745 5,724 5,567 6,040 6,556 Cash Flow Statements 2009
2010 2011 2012E 2013E 2014E 2015E Net income 717 622 514 64 510 574
623 Depreciation and amortization 385 383 406 369 414 440 432
Working Capital 635 (448) (400) (184) (165) (116) (94) Other (576)
284 130 482 109 121 129 Operating Cash Flow 1,162 840 647 741 868
1,019 1,091 Capex and acquisitions (209) (417) (602) (3,230) (700)
(350) (350) Divestments and Others 1,000 (53) 722 117 0 0 0
Investing Cash Flow 791 (470) 121 (3,113) (700) (350) (350) Change
in debt (923) (520) 35 556 100 (100) (200) Dividends 0 (100) (147)
(147) (150) (153) (172) Others 0 (33) (252) 14 0 0 0 Financing Cash
Flow (923) (654) (365) 422 (50) (253) (372) Net Change in Cash
1,030 (284) 404 (1,950) 118 416 369 Cash at Beginning 1,156 2,143
2,628 2,441 205 324 740 FX effect on cash/others 43 (769) 590 286 0
0 0 Cash at End 2,143 2,628 2,441 205 324 740 1,109 Sources:
Company reports and Santander estimates.
-
Ternium: Solid Fundamentals to Outweigh Short-Term
Uncertainty
12 Important disclosures/certifications are in the Important
Disclosures section of this report. U.S. investors inquiries should
be directed to Santander Investment Securities Inc. at (212)
583-4629/ (212) 350-3918.
IMPORTANT DISCLOSURES Ternium12-Month Relative Performance (U.S.
Dollars)
Sources: Bloomberg and Santander.
TerniumThree-Year Stock Performance (U.S. Dollars)
Source: Santander.
Ternium
MSCI
0
20
40
60
80
100
120
140
S-11 N-11 J-12 M-12 M-12 J-12 S-12
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
J-09 S-09 D-09 M-10 J-10 S-10 D-10 M-11 J-11 S-11 D-11 M-12
J-120
500
10001500
2000
2500
3000
35004000
4500
5000
Ternium ( L Axis) MXLA
B $32.1012/12/11
B $40.0012/8/09
B $25.007/6/09
B $50.006/14/10
B $47.0012/13/10
Analyst Recommendations and Price Objectives B: Buy H: Hold UP:
Underperform UR: Under Review
-
2012
IMPORTANT DISCLOSURES
Key to Investment Codes Rating
Definition
% of Companies
Covered with This Rating
% of Companies Provided Investment Banking
Services in the Past 12 Months
Buy Expected to outperform the local market benchmark by more
than 10%. 54.46% 19.67%Hold Expected to perform within a range of
0% to 10% above the local market
benchmark. 32.14% 12.50%Underperform/Sell Expected to
underperform the local market benchmark. 12.95% 6.90%Under review
0.45% --The numbers above reflect our Latin American universe as of
Friday, August 24, 2012. For a discussion, if applicable, of the
valuation methods used to determine the price targets included in
this report and the risks to achieving these targets, please refer
to the latest published research on these stocks. Research is
available through your sales representative and other electronic
systems. Target prices are 2012 year-end unless otherwise
specified. Recommendations are based on a total return basis
(expected share price appreciation + prospective dividend yield)
unless otherwise specified. Stock price charts and rating histories
for companies discussed in this report are also available by
written request to Santander Investment Securities Inc., 45 East
53rd Street, 17th Floor (Attn: Research Disclosures), New York, NY
10022 USA. Ratings are established when the firm sets a target
price and/or when maintaining or reiterating the rating. Ratings
may not coincide with the above methodology due to price
volatility. Management reserves the right to maintain or to modify
ratings on any specific stock and will disclose this in the report
when it occurs. Valuation methodologies vary from stock to stock,
analyst to analyst, and country to country. Any investment in Latin
American equities is, by its nature, risky. A full discussion of
valuation methodology and risks related to achieving the target
price of the subject security is included in the body of this
report. The benchmark used for local market performance is the
country risk of each country plus the 1-year U.S. Treasury yield
plus 5.5% of equity risk premium, unless otherwise specified. The
benchmark plus the 10.0% differential used to determine the rating
is time adjusted to make it comparable with the total return of the
stock over the same period. For additional information about our
rating methodology, please call (212) 350 3974. This research
report (report) has been prepared by Santander Investment
Securities Inc. ("SIS"; SIS is a subsidiary of Santander Investment
I, S.A. which is wholly owned by Banco Santander, S.A.
["Santander"]) on behalf of itself and its affiliates
(collectively, Grupo Santander) and is provided for information
purposes only. This report must not be considered as an offer to
sell or a solicitation of an offer to buy any relevant securities
(i.e., securities mentioned herein or of the same issuer and/or
options, warrants, or rights with respect to or interests in any
such securities). Any decision by the recipient to buy or to sell
should be based on publicly available information on the related
security and, where appropriate, should take into account the
content of the related prospectus filed with and available from the
entity governing the related market and the company issuing the
security. This report is issued in Spain by Santander Investment
Bolsa, Sociedad de Valores, S.A. (Santander Investment Bolsa) and
in the United Kingdom by Banco Santander, S.A., London Branch.
Santander London is authorized by the Bank of Spain. This report is
not being issued to private customers. SIS, Santander London and
Santander Investment Bolsa are members of Grupo Santander. The
following analysts hereby certify that their views about the
companies and their securities discussed in this report are
accurately expressed, that their recommendations reflect solely and
exclusively their personal opinions, and that such opinions were
prepared in an independent and autonomous manner, including as
regards the institution to which they are linked, and that they
have not received and will not receive direct or indirect
compensation in exchange for expressing specific recommendations or
views in this report, since their compensation and the compensation
system applying to Grupo Santander and any of its affiliates is not
pegged to the pricing of any of the securities issued by the
companies evaluated in the report, or to the income arising from
the businesses and financial transactions carried out by Grupo
Santander and any of its affiliates: Walter Chiarvesio*, Eugenia
Fernandez Pouchan *. *Employed by a non-US affiliate of Santander
Investment Securities Inc. and not registered/qualified as a
research analyst under FINRA rules, and is not an associated person
of the member firm, and, therefore, may not be subject to the FINRA
Rule 2711 and Incorporated NYSE Rule 472 restrictions on
communications with a subject company, public appearances, and
trading securities held by a research analyst account. Grupo
Santander receives non-investment banking revenue from Usiminas,
Gerdau, CAP, ICH. Within the past 12 months, Grupo Santander has
managed or co-managed a public offering of securities of Gerdau.
Within the past 12 months, Grupo Santander has received
compensation for investment banking services from Gerdau, CAP, CSN,
Ternium. In the next three months, Grupo Santander expects to
receive or intends to seek compensation for investment banking
services from CAP, Ternium. The information contained within this
report has been compiled from sources believed to be reliable.
Although all reasonable care has been taken to ensure the
information contained within these reports is not untrue or
misleading, we make no representation that such information is
accurate or complete and it should not be relied upon as such. All
opinions and estimates included within this report constitute our
judgment as of the date of the report and are subject to change
without notice. From time to time, Grupo Santander and/or any of
its officers or directors may have a long or short position in, or
otherwise be directly or indirectly interested in, the securities,
options, rights or warrants of companies mentioned herein. Any U.S.
recipient of this report (other than a registered broker-dealer or
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without in any way limiting the foregoing, accepts responsibility
(solely for purposes of and within the meaning of Rule 15a-6 under
the U.S. Securities Exchange Act of 1934) for this report and its
dissemination in the United States. 2012 by Santander Investment
Securities Inc. All Rights Reserved.