Banc Sabadell | The demand for steel in Europe (40% EBITDA) is somewhat weaker than expected (the expected recovery in car making has not happened), which means price rises are not expected.
In the US (25% EBITDA) demand is solid, even if price weakness results from increases in supply which now seem more rational. Overall, it is expected that a fall in mineral prices (iron ore prices have fallen 25% from its highs), more in line with the real steel demand situation, could lead to an expansion in margins. This is already being seen, but should have a greater impact in future quarters.
Cash generation: strong cash generation is expected in 2019 because of the reduction of capex and taxes (already announced in the Q219 results), but above all because of the release of working capital. It is expected that this could be very relevant in the second half of 2019 (especially in Q419) and above what is expected, thanks to the fall in mineral prices. This net debt should be reduced significantly compared to the 10.2 Bn$ with which it ended the first quarter of 2019 (vs 11.4 Bn$ estimated by BS if there is no improvement in working capital). The Net debt/EBITDA for 2019 should end at <2X, despite the operational weakness this year. On the other hand, the plan to sell assets worth ~2 Bn$ has been confirmed and, although there are no concrete dates for the announcement, it has not been ruled out in the short term given that some operations are already advanced.
Shareholder remuneration: when the company reaches its objective of net debt of ~7 Bn$ (which, if the asset sale described is completed, could be during 2020) it plans a dividend increase (current yield 1.4%) and share buyback.
Demand for steel is not recovering, so the margins situation will to a large extent depend on the evolution of raw materials, which further reduces operational visibility, which we think ensures volatility in the share price.
Meanwhile ArcelorMittal has showed that it is doing its homework in reducing cash outflows, given a tight financial situation, which could lead to announcements of improved shareholder remuneration in 2020. Although it will be a difficult year, in the absence of a recession (which we do not expect), the market is assuming an excessively pessimist scenario. In concrete we are assuming an EBITDA in perpetuity ~6 Bn$, which seems reasonable if we take into account that the average EBITDA for the last 10 years has been ~7.8 Bn$ (+25% vs 2019).
