Erdemir short view

Erdemir posted a bottom line of TRY152m in 3Q12 (down 45% y-y, BNPP estimate: TRY103m, BBG Cons: TRY120m) on EBITDA of TRY319m (down 54% y-y, BNPP estimate: TRY248m) and revenues of TRY2.35b (down 4% y-y, BNPP estimate: TRY2.16b). Results came above our estimates mainly on a combination of slightly higher than expected volumes (6% higher than expected) and prices (2% higher than expected).

The average sales price, however, was still down by 3% q-q and 14% y-y in 3Q12 which was the main reason behind the y-y declines in EBITDA and the bottom line. Volumes, on the other hand, rose by 8% y-y and 5% q-q, as Erdemir offset lower flat steel production with significantly higher long steel production in order to take advantage of relatively better margins in long steel during the quarter.

Net debt eased by 18% y-y and 4% q-q to TRY3.1b as lower steel and raw material prices reduced the company’s net working capital need and the company’s inventory position (also in number of days) improved to 145 days, down 16% y-y.

The management said they maintained the EBITDA target of 10% to 12% for 2012 (vs. 23.5% in 2011) and the volume target of 7.4m tonnes (up 11% y-y) in the 3Q12 earnings teleconference. Yet they warned that conditions for 4Q12 remained challenging, especially regarding volumes due to increased competition from imports, and they expected 2013 to be at least as much as challenging as 2012.

While the company has done better than we expected in 3Q12, we remain concerned about the volumes / margins for 4Q12 and 2013 given the emerging over-capacity in world steel industry and less strong outlook for steel demand growth with the concerns on global economic growth in the medium term. Note that while we were expecting some recovery in world steel prices starting 4Q12 in our last update on Erdemir on July 26, indicative steel prices have declined further along with raw material prices on weak demand for both types since then.

ERDEMIR, HOLD, TP2.04