Operational Improvements Will Position For Future Demand In Key Industries

Key Takeaways

• Investments in efficiency and cost reduction, including plant retrofitting, aim to boost productivity and positively impact net margins.
  
• Strategic focus on domestic and regional markets, coupled with trade defense measures, aims to enhance market share and revenue growth.
  
• Economic challenges, competition, and trade issues pose risks to Usiminas's revenue and profitability, while significant investments could pressure margins if efficiencies are delayed.

Catalysts

Manufactures and markets flat steel products in Brazil and internationally.

• Usiminas is investing in operational efficiency and cost reduction initiatives, including retrofitting its coke plant and building a PCI plant. These improvements are expected to reduce fuel costs and improve productivity, impacting net margins positively.
  
• The company plans to increase its flat steel sales volumes with an improved sales mix, leading to a slight increase in net revenue per ton. This is expected to drive revenue growth.
  
• Usiminas is focusing on the domestic market and strategically utilizing export opportunities, particularly in Argentina, to capitalize on regional demand and improve sales and earnings.
  
• An anticipated increase in demand from industries such as automobiles, oil and gas, and home appliances is expected to bolster sales volumes and revenue growth in 2025, despite macroeconomic challenges.
  
• Usiminas is actively pursuing trade defense measures against unfair steel imports to protect its market share and improve pricing power, which can have a positive influence on revenue and margins.

Usinas Siderúrgicas de Minas Gerais Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Usinas Siderúrgicas de Minas Gerais's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.6% today to 4.2% in 3 years time.
• Analysts expect earnings to reach R$1.2 billion (and earnings per share of R$1.02) by about March 2028, up from R$-145.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$998 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, up from -49.3x today. This future PE is greater than the current PE for the BR Metals and Mining industry at 7.6x.
• 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 22.84%, as per the Simply Wall St company report.

Usinas Siderúrgicas de Minas Gerais Future Earnings Per Share Growth

Risks

• The slowdown in the Brazilian economy due to high interest rates and macroeconomic challenges could impact demand in sectors that consume steel, such as home appliances, automobiles, and household essentials, potentially affecting revenue.
  
• The high level of flat steel imports into Brazil, especially from China at subsidized prices, poses a risk of unfair competition, potentially threatening Usiminas's market share and impacting revenue and profitability.
  
• The volatility in international trade and the imposition of new tariffs and trade defenses, such as increased protections in the US, could affect Usiminas's export opportunities, impacting revenue stability.
  
• The uncertainty in iron ore prices and the drop in sales volume from the mining unit have not been fully offset by gains in the steel unit, which could pressure overall earnings if conditions do not improve.
  
• The ongoing investments, such as the repair of the coke plant and the development of the PCI plant, while aimed at gaining competitiveness and efficiency, require significant CapEx, which might pressure margins if projected savings and efficiencies are delayed or costs increase.

Valuation

• The analysts have a consensus price target of R$7.286 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$10.0, 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$28.1 billion, earnings will come to R$1.2 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 22.8%.
• Given the current share price of R$5.84, the analyst price target of R$7.29 is 19.8% 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.