Ternium - An important step for a steel plant at Açu (Slightly positive) - Barclays
Today, LLX (LLXL3, Not Rated) announced that Ternium (TX, 1-OW/-2Neu, TP US$47/shr) signed an agreement to acquire 100% of the shares of Siderúrgica Norte Fluminense (SNF). In our view, the market has been waiting for the next capex move by TX for a while, and this may be considered an important landmark in its decision making process. We consider higher gearing levels a positive step by TX's management to move its capital structure to more optimal levels. TX is our TOP pick amongst Latin American steels.
Limited details on the transaction: SNF is a company controlled by LLX Açu, and comprises a steel project located at the Açu Industrial Complex, with an expected future crude steel capacity of 5.6Mtpa. LLX Açu and SNF also signed two take or pay long-term port handling service agreements for the shipment of steel products and the unloading of coal (required in the BOF production process).
Eliminating 3rd party slab dependence - Strategically positive for TX. Currently, TX is structurally short of slabs (crude steel capacity) for its rolling mills in Mexico. The "slab deficit" implies in lower potential margins, and may incur in higher profitability variance, as the company is highly dependant on favorable spreads between HRCs (hot-rolled coils) and slabs. At full capacity, we calculate the company would post a deficit in slab requirements reaching 3.6Mt. In our view, a potential move by management to integrate operations is a positive, as it would increase margin potential/visibility going forward.
This is not a done deal, yet: This is not the first time that news on a potential investment by Ternium at the Port of Açu hit the market. There were no official statements from Ternium, and when contacted the company adopted a cautious stance on the overall status of the project. We acknowledge the high complexity involved in building a greenfield project of 5.6Mtpa of crude steel capacity. We calculate this investment may entail around US$6bn (only slab capacity / no rolling capacity). This would represent a significant step for Ternium, and in this context we understand management's caution on the subject. Nevertheless, given that the company has purchased a land plot at the site and continues highly committed to project analysis, we believe the probability of TX moving forward with the project has increased. No values were disclosed for the purchase, which we believe may be immaterial.
Rebalancing of capital structure, a potential trigger for Ternium: We forecast Ternium to be in a US$1.3bn net cash position by the end of 2010, partially boosted by the last payment related to the Sidor nationalization process (US$256mn due in November). We consider TX's management amongst the best steel operators in Latin America and believe the reigniting of a significant capex program is just a matter of time. A brownfield expansion of its Siderar facilities in Argentina may also be considered as an option to balance the company's current slab deficit.
We reiterate Ternium as our TOP pick amongst steelmakers in Latin America. In our view, the stock offers a highly discounted entry point (cheap valuation) and solid execution capabilities. TX is trading at 3.7x 11E EV/EBITDA, a 38% discount to Brazilian peers and below its normalized multiple.
TX is the bargain of the bargains . This company has simply an extraordinary management. Their market LAT.AM. is booming It's fundamentals are unbeatable No way it remains that cheap for more Soon we'll see $70.00 , a double in some months.