Oxelosund And Lulea Transformations With Electric Arc Furnaces Will Boost Earnings And Margins

Key Takeaways

• SSAB's production transformation and focus on high-margin, niche products are expected to enhance revenue stability and net margins.
  
• Strategic R&D and decarbonization investments for eco-friendly steel aim to drive long-term cost savings and profit margin improvements.
  
• Weak market conditions, regulatory risks, and fluctuating raw material costs pose challenges to SSAB's profitability and strategic goals.

Catalysts

Produces and sells steel products in Sweden, Finland, Rest of Europe, the United States, and internationally.

• SSAB's transformation plans in Oxelosund and Lulea, including the investment in an electric arc furnace and increased capacity for high-strength steels and premium steels, are expected to create a more flexible production setup with lower costs and a change in product mix towards higher-margin products, positively impacting future earnings and net margins.
  
• The ability to shift product mix by 1 million tonnes towards more niche and stable pricing products can ensure more stable pricing and earnings over time compared to standardized steel, which could positively impact future revenue stability and margins.
  
• Increasing demand from segments such as automotive, heavy vehicles, and construction machinery for emission-free and environmentally friendly steel products is expected to enhance SSAB’s future revenue streams, driven by sustainable products and higher market demand.
  
• SSAB's ongoing cost-cutting measures and increased flexibility in its production process, including the adjustment of labor costs and the focus on variable costs rather than fixed ones, can help maintain or even slightly improve net margins in weaker market conditions.
  
• Strategic capital expenditures on R&D and decarbonization projects such as eliminating CO2 emissions through new investments are expected to lead to significant long-term cost savings and potentially higher pricing power from environmentally friendly product offerings, positively impacting future profit margins and revenue potential.

SSAB Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SSAB's revenue will decrease by 0.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 9.3% in 3 years time.
• Analysts expect earnings to reach SEK 10.2 billion (and earnings per share of SEK 10.07) by about December 2027, up from SEK 7.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK 4.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.2x on those 2027 earnings, up from 6.0x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.29%, as per the Simply Wall St company report.

SSAB Future Earnings Per Share Growth

Risks

• Ongoing maintenance and investment projects across SSAB's facilities may lead to increased costs and temporary production inefficiencies, impacting short-term earnings and profitability.
  
• Weak and cautious market conditions in Europe and North America, particularly in the construction and automotive sectors, could suppress demand and exert downward pressure on prices, negatively affecting revenue.
  
• The necessity of environmental permits for expansions, such as in Lulea, poses regulatory risks and potential delays in project timelines, which could impact strategic goals and capital expenditures.
  
• Fluctuations in raw material costs, especially for pellet and coking coal, can affect production costs and profitability, with potential lag effects in price adjustments causing short-term financial strain.
  
• High inventory levels among steel service centers and volatile market conditions could lead to reduced apparent demand, affecting sales volumes and revenue in the near term.

Valuation

• The analysts have a consensus price target of SEK 60.65 for SSAB 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 SEK 73.5, and the most bearish reporting a price target of just SEK 49.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 108.9 billion, earnings will come to SEK 10.2 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK 48.09, the analyst's price target of SEK 60.65 is 20.7% 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.