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Companhia Siderurgica and Ternium Downgraded at BofA On Bearish Steelmaker View

Published 27-08-2022, 01:06 am
© Reuters.
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By Sam Boughedda

A BofA analyst downgraded shares of Companhia Siderurgica Nacional (NYSE:SID) to Underperform and Ternium SA (NYSE:TX) to Neutral in a note on Friday.

The analyst said in a research piece that after a largely disappointing 2Q22 results season, they have taken stock of market conditions and "continue to notice clear warning signals of a top."

"We’ve been more negative on miners since early January but are now also more bearish on steelmakers as earnings momentum has peaked and as macro trends become headwinds," wrote the analyst.

On Companhia Siderurgica Nacional, he lowered the price target on the company's ADRs to $3.20, stating the downgrade reflects a more negative stance on LatAm steelmakers.

"CSN is more exposed to spot steel prices in Brazil and should be hurt the most from a pricing war compared to Usiminas (OTC:USNZY), which has roughly 1/3 of its sales going to the auto sector based on 1-year contracts, already set until 2023. On top of that, we are wary of CSN’s capital allocation, with a heavy capex cycle particularly in the mining segment (~R$12bn over the next four years), cash outflows for recent acquisitions (~R$5.4bn for LafargeHolcim (OTC:HCMLY) cement, up to R$3.2bn for CEEE-G energy assets – see our feedback) and plans to up to double CSN’s size over the next 2-3 years," wrote the analyst.

On Ternium, he lowered the firm's price target to $40 per share from $53, explaining that the downgrade and price target reflects their more cautious view on steel and their relative preference for long steel over flats.

"Valuation remains attractive as we see Ternium trading at ~3.1x EV/EBITDA and generating a robust 21% FCF yield in 2023, while its balance sheet should remain strong even on a more stressed scenario. However, we recognize the lack of short term triggers given the ongoing steel price declines, and believe shareholder returns should remain muted as TX approaches a new investment cycle, with a potential up to US$3bn investment for new EAF/DRI capacity in North America to meet new USMCA rules by 2027," the analyst said.

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