Fortune is fickle We initiate coverage of Stalprofil with a SELL recommendation and a 12M target price of PLN 8.0 per share (down 7.4%).
After a record performance in 2021-22, in FY23e we forecast a 56% y/y decline in EBITDA to PLN 55mn. A normalization of steel prices is noticeable in the market. In July and August, the HRC steel price fell by 15% vs. 2Q'23, but the price still remains 32% above the 2015-20 average (EUR 500/t). Based on historical steel prices and margins over the period, it appears that the profitability of steel distributors is more strongly affected by the price change itself than by the price level, prompting us to estimate a negative FIFO effect in Steel segment and decline 4.2pp y/y in EBIT margin. Currently, demand for steel is not high, and steel production in Poland in 1H'23 fell by 21.7% y/y. In addition, high competition (Stalprofil's share of steel consumption in Poland is around 2%), may translate into a higher competitiveness and negatively impacting margins. Lower demand, also has a negative impact on volume sales, which we estimate fall by 14% y/y in 2023. Further price declines partly reflect the decline in steel input costs for the BOF and EAF methods, which fell by 5% and 14% respectively in July and August vs. 1H'23.
The infrastructure segment is also susceptible to lower amount of investments. We estimate that demand for pipe insulation related to the gas transmission may be lower in the next few quarters, as evidenced by a lower number of reported orders or a decrease of backlog level by PLN 460m in Q1'23 vs. Q2'21. Additionally, according to the transmission system development plan published by Gaz-System, it appears that the plans for 2023-27 are still ambitious, but not as ambitious as in earlier years - the average annual length of the transmission network in 2023-27 will be 285km vs. 530km in 2020-22. Nevertheless, lower volumes in infrastructure Stalprofil can balance higher margins resulting from falling polyethylene and polypropylene prices.
According to our forecasts, Stalprofil is valued at an average P/E ratio for 2023-25 of 6,4x, indicating a 16% premium vs. the average ratio in 2018-20.
