Gerdau S.A. Pfd Sponsored ADR Repr 1 Pfd ShA play on steel price recovery & dropped raw materials
Supporting Arguments
▪ Steel prices to gain from China’s support measures & rate cuts
▪ A drop in raw materials prices to support Gerdau’s margins
▪ Valuation multiples also imply upside for the name
Investment Thesis
Gerdau is a Brazilian long steel producer, the largest in the Americas, as well as the top special steel supplier globally. The company is a leading steel scrap recycler in the world, offering a wide range of long, flat and HVA steel products. The stocks of Gerdau are listed on the São Paulo (B3) and New York (NYSE) stock exchanges.
Anticipated steel price rebound is to boost the stock. Steel prices in the US and globally have been under pressure especially since the Q2 2024, amid high interest rates and sluggish end-user demand. But we expect steel prices to gain from a number of factors going forward. First, recently approved new wave of measures to support construction industry in China in the amount of around CNY 1.4 tn ($196 bn). The amount substantially exceeded the preliminary agreement with commercial banks. Second, the monetary policy easing cycle in the US that is expected to start in September is likely to support steel demand and prices in the country.
Raw materials slump is to uphold industry margins. Even if we assume that steel price growth might be capped due to structural risks, support is provided by the recent drop in benchmark hard coking coal prices by c.23% (since the start of Q3) to $231/t FOB AU, in iron ore prices by 13% m/m to $101/t CIF China, and in Turkish scrap – by 6,8% m/m to $364/t. Non-fully vertically integrated steelmakers like Gerdau should especially benefit from such conditions in the S-T. The matter is that their (operating) marginality is likely to grow at a faster pace than fully integrated plants’ margins, thanks to a stronger dependency on market prices. In addition, the company’s focus on high value-added (HVA) products ) products should also be a factor of support for its financials and margins. Thus, potential of some rebound in steel prices and publication of the 3rd quarter results (expected on November 6), investor day (appointed on October 4) and declaration of dividends should be the key drivers for the stock.
Valuation may also be a factor of support. Analysis of EV/EBTIDA and P/E multiples shows that Gerdau is trading substantially lower than industry average level implying upside potential from the fundamental point of view. EV/EBITDA is at 4,2x vs 6,9x of M&M industry average, while P/E is at 7,1x vs almost 14,3x of industry average. Technical analysis suggests that breakout above the 50-day moving average and approaching of stochastic RSI readings to a relatively oversold level may imply a potential shift in the market sentiment.
We forecast a 14% upside in the stock, with a 2-month price target of $3.75/share and a “Buy” rating. A stop-loss order is recommended at $2.70/share (−18%).
