Improved Production Efficiency And Domestic Demand Will Strengthen Future Prospects For Brazilian Steel

Key Takeaways

• Enhanced production efficiency and cost-cutting strategies are anticipated to reduce costs and improve future net margins and earnings.
  
• Strong financial moves and market demand growth are expected to drive future revenue, operational margins, and earnings per share.
  
• Usiminas faces challenges from declining steel demand, Chinese competition, and economic pressures potentially impacting revenue and profitability.

Catalysts

Manufactures and markets flat steel products in Brazil and internationally.

• Usiminas' increased production efficiency, with a 54% higher volume at Blast Furnace 3 and improved productivity using two blast furnaces instead of three, suggests that future cost reductions could positively impact net margins.
  
• The company's focus on cost-cutting strategies, including operational efficiencies and price management, aims to maintain a downward cost trajectory in Q4 2024, potentially leading to higher future earnings.
  
• The projected growth in Brazilian GDP and increasing demand in domestic sectors like automobiles and civil construction is expected to drive higher steel sales, positively impacting Usiminas' future revenue.
  
• The company's successful issuance of debentures, reducing net debt and financial leverage, reflects investor confidence and financial stability, potentially impacting future earnings per share positively due to lower interest costs.
  
• Usiminas' rationalization of CapEx without project cancellations, focusing on capital efficiency and cost control, is expected to maintain cash flow stability and improve operational margins over time.

Usinas Siderúrgicas de Minas Gerais Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Usinas Siderúrgicas de Minas Gerais's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.5% today to 3.4% in 3 years time.
• Analysts expect earnings to reach R$983.3 million (and earnings per share of R$0.8) by about February 2028, up from R$912.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.1 billion in earnings, and the most bearish expecting R$721 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 7.6x today. This future PE is greater than the current PE for the BR Metals and Mining industry at 7.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.88%, as per the Simply Wall St company report.

Usinas Siderúrgicas de Minas Gerais Future Earnings Per Share Growth

Risks

• The Brazilian economy is experiencing low activity in the agriculture sector and may face moderated growth in 2025, which can affect family consumption and the industrial sector, potentially impacting revenue.
  
• The international steel market is showing a decline in demand for the third consecutive year due to decreased purchasing power, monetary tightening, and geopolitical uncertainties, which may negatively influence Usiminas' earnings.
  
• The ongoing surplus of steel exports from China exerts price pressure in the domestic market, creating unfair competition and potentially reducing net margins for Usiminas.
  
• High levels of imports and unfair competition, particularly from Chinese steel products, could negatively affect Usiminas’ domestic sales and profitability.
  
• Persistent high-interest rates in Brazil might constrain economic growth and consumption, possibly affecting Usiminas' revenue and earnings projections.

Valuation

• The analysts have a consensus price target of R$7.45 for Usinas Siderúrgicas de Minas Gerais based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$10.3, and the most bearish reporting a price target of just R$5.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$29.1 billion, earnings will come to R$983.3 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 22.9%.
  
• Given the current share price of R$5.6, the analyst price target of R$7.45 is 24.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.