Anti-Dumping Duties And Net-Zero Investments Will Propel Turkish Steel Producer's Revenue

Key Takeaways

• Government-imposed anti-dumping duties and investigations may create a favorable competitive environment, potentially boosting future revenue and margins.
  
• Investments for net-zero emissions by 2050 and earthquake insurance payments may enhance operational efficiency and support earnings.
  
• High CapEx and net debt, combined with weak demand and external uncertainties, are straining profitability and financial stability.

Catalysts

Produces and sells iron and steel rolled products, alloyed and non-alloyed iron, steel and pig iron castings, cast and pressed products, coke, and by-products in Turkey and internationally.

• The expected positive impact of anti-dumping duties imposed by the Turkish government on HRC products from China, Russia, Japan, and India in the first quarter of 2025 is likely to support domestic steel prices and thus potentially enhance revenue.
  
• High capacity utilization rates and planned production increase to reach 8 million tons in 2024 suggest operational efficiency, leading to potential increases in revenue and possibly improved net margins if cost controls are maintained.
  
• The completion and anticipated results of anti-dumping investigations regarding imports of heavy plates and tin plates in 2025 are expected to create a more favorable competitive environment, potentially boosting future revenue and margins.
  
• The transformative investments aimed at achieving net-zero emissions by 2050, with substantial funding targeted by 2030, may enhance operational efficiency and reduce long-term costs, potentially benefiting earnings.
  
• Anticipated final insurance payments related to the 2023 earthquake offer a cash inflow that could enhance the financial position and support net earnings in the near term.

Eregli Demir ve Çelik Fabrikalari T.A.S Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eregli Demir ve Çelik Fabrikalari T.A.S's revenue will grow by 26.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.5% today to 9.2% in 3 years time.
• Analysts expect earnings to reach TRY 36.6 billion (and earnings per share of TRY 4.27) by about December 2027, up from TRY 18.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting TRY 46.7 billion in earnings, and the most bearish expecting TRY 16.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, up from 9.7x today. This future PE is greater than the current PE for the TR Metals and Mining industry at 16.2x.
• Analysts expect the number of shares outstanding to grow by 7.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 36.23%, as per the Simply Wall St company report.

Eregli Demir ve Çelik Fabrikalari T.A.S Future Earnings Per Share Growth

Risks

• The company's guidance of achieving lower EBITDA per ton ($80 to $90) by the end of the year compared to the current $99 per ton indicates pressure on profitability, which could affect net margins.
  
• High investment expenditures are leading to increased net debt, resulting in a higher net debt-to-EBITDA ratio (expected around 3x by year-end), which could impact future earnings and financial stability.
  
• Significant CapEx spending, with $800 million to $850 million planned for next year, could strain cash flow and possibly affect the company's ability to generate net profit.
  
• Weak end-user demand and high inventory levels in Europe are suppressing steel prices, potentially impacting revenue from the company's key markets.
  
• The company faces uncertainty in predicting future results due to reliance on forward-looking statements and external economic factors, which raises risks around achieving revenue targets.

Valuation

• The analysts have a consensus price target of TRY 27.46 for Eregli Demir ve Çelik Fabrikalari T.A.S 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 TRY 34.5, and the most bearish reporting a price target of just TRY 19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be TRY 396.3 billion, earnings will come to TRY 36.6 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 36.2%.
• Given the current share price of TRY 25.78, the analyst's price target of TRY 27.46 is 6.1% 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.