TURKEY – Steel Sector Re-Initiating Coverage: Once the Dust Settles

TURKEY – Steel Sector Re-Initiating Coverage: Once the Dust Settles

We are re-initiating coverage of the Turkish steel industry with a focus on Erdemir and Kardemir D shares. Near-term outlook for the steel sector appears less-than-inspiring against a backdrop of lacklustre global demand conditions. We think share prices of ISE-listed steel companies will likely remain under pressure in the short term, given headwinds posed by high volatility in steel prices. Our preference for Kardemir D over Erdemir is predicated on i) a more attractive valuation; ii) capacity expansion plans signifying long term growth potential; iii) richer product mix; and iv) risk of a potential Erdemir share sale by ArcelorMittal, once the lock-up period expires in March 2013.

EREGL: Trading above global peers on near term EBITDA

Target Price: TRL2.68

Upside Potential: 12%

Recommendation: L/T HOLD, S/T UNDERPERFORM

Following a 48% yoy contraction in 2012, we project 30% EBITDA growth for Erdemir in 2013, thanks to higher sales volumes and prices, despite flat raw material costs. Yet, the shares trade at 7.5x and 6.7x EV/EBITDA on our 2013 and 2014 estimates, at a premium to global peer averages of 6.3x and 5.4x, respectively.

Erdemir shares have traded at an 8% discount to global peers in the last five years on EV/EBITDA.

The lock-up period for ArcelorMittal to sell its remaining 18.7% stake at Erdemir expires in March 2013, whereafter the shares might come under some pressure. Our DCF-Peer comparison blended target price of TRL2.68 per share denotes 12% upside potential at current levels.   

KRDMD: Attractive from a long-term perspective

Target Price: TRL1.84

Upside Potential: 16%

Recommendation: L/T BUY, S/T MARKETPERFORM

We are favourably disposed to Kardemir, due to: i) its relatively higher vertical integration in raw material procurements compared to domestic peers; ii) its attractive near term earnings multiples; iii) an improvement in its product mix towards more value-added products (rail and profile); and iv) crude steel and rolling capacity expansion plans.

We expect the Company to generate average EBITDA growth of 10% per annum until 2020, thanks to extensions to its crude steel and rolling capacities by 2015. Our DCF-peer comparison blended valuation points to 16% upside potential for Kardemir D.

The shares trade at 5.1x EV/EBITDA and 6.5x P/E on our 2013 estimates, above their historical averages, yet below those of global peers.  

 

Burgan Sec.