Transition To Electric Arc Furnaces Will Improve Efficiency And Sustainability

Key Takeaways

• Strategic investments in advanced high-strength steels and electric arc furnaces aim to boost revenue, reduce costs, and enhance operational efficiency.
  
• Strong demand in mining and energy, along with automotive sector expansion, supports potential revenue growth and market share increase.
  
• Decreased operating results due to pricing challenges and production issues could threaten SSAB's future revenue and financial stability.

Catalysts

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

• SSAB's strategic investments in Luleå, including a cold mill complex, aim to enhance capacity for advanced high-strength steels, potentially shifting the company's product mix towards higher-margin premium grades, which could boost future revenue and net margins.
  
• The planned transition to electric arc furnaces in Luleå and Oxelösund is expected to increase production flexibility, reduce CO2 emissions, and cut fixed costs, which should positively impact SSAB's operational efficiency and net earnings.
  
• Continued strong demand from sectors like mining and energy, particularly for Special Steels, suggests potential volume growth in core segments, potentially leading to improved revenue streams in the near future.
  
• SSAB's focus on expanding its product offerings in the automotive sector, with capabilities in producing third-generation advanced high-strength steels, could drive continued revenue growth and gain market share in this resilient segment.
  
• Strategic investments and a strong cash position allow SSAB to fund its major transformation initiatives without compromising financial stability, setting the stage for long-term profitability growth.

SSAB Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SSAB's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 9.1% in 3 years time.
• Analysts expect earnings to reach SEK 9.9 billion (and earnings per share of SEK 9.79) by about January 2028, 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 SEK4.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.8x on those 2028 earnings, up from 6.4x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 15.2x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.05%, as per the Simply Wall St company report.

SSAB Future Earnings Per Share Growth

Risks

• The company's operating result for the full year 2024 decreased compared to the previous year, primarily due to price decreases in the American market, which could adversely impact SSAB's future revenue and earnings.
  
• The company faces bottlenecks in production processes and requires significant investment to upgrade aging equipment like the hot strip mill, which could pressure net margins and revenue if not addressed promptly.
  
• The American market where SSAB operates is highly sensitive to supply and demand fluctuations, with recent price drops affecting financial performance, posing a risk to future earnings stability.
  
• Despite investments, the transition to new production technologies like electric arc furnaces is capital intensive, with uncertainties surrounding CO2 emission reduction and raw material supply that may affect SSAB's profitability and financial sustainability.
  
• Seasonal fluctuations and inconsistent demand in segments like Special Steels and Construction can lead to volatile revenue streams, affecting overall earnings consistency and financial forecasts.

Valuation

• The analysts have a consensus price target of SEK55.93 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 SEK67.0, and the most bearish reporting a price target of just SEK40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK108.5 billion, earnings will come to SEK9.9 billion, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of SEK51.04, the analyst's price target of SEK55.93 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.