SAO PAULO – Although share prices are considered very attractive by investors after the strong pressure of recent weeks with the fall of iron ore, Credit Suisse still notes that there is a lack of appetite to invest in the mining sector, as pointed out by the analyst Caio Ribeiro in a report. But he highlighted that other names may be more attractive.
The analyst remains “selectively constructive” in the basic materials sector (which includes mining, steel, pulp and paper), preferring shares in steel companies such as CSN (CSNA3) and Usiminas (USIM5) to mining papers. In addition, Ribeiro highlights that, while pulp and paper stocks seem discounted, the expectation of new offers in the sector in the coming months leads to less enthusiasm.
“The feeling has clearly gotten worse lately for a variety of reasons. We note that concerns have been mounting over cuts in China’s crude steel production (down 8% in July year-on-year), while there was a tightening in the availability of credit for property and infrastructure developers in the country earlier this year, along with a seasonally weaker scenario of construction activity in the summer months, which has been reducing demand for steel and leading steelmakers to reduce their iron ore purchases,” he points out.
Meanwhile, there are doubts as to whether the return to construction activities, which traditionally starts in August, could be delayed due to the new Covid-19 outbreak (although there is good news on the topic this Monday, with China reporting no cases of Covid for the first time in a month). It should be noted that the resurgence of the virus has disrupted construction activities in several cities, which has reduced demand for steel products and iron ore, according to Fastmarkets.
“Furthermore, we note that investors are becoming more negative about the prospects for Brazil, given fiscal concerns and difficulties in passing the tax reform, uncertainty about the 2022 electoral scenario and fears of a faster increase interest rates to contain inflationary pressures”, says Ribeiro.
Interesting valuation, but with short-term triggers?
However, despite these headwinds, the analyst sees that the valuation in the sector seems quite attractive and believes that, once the dust settles, there may be interesting opportunities to invest.
After the liquidation, the Credit analyst sees Vale (VALE3) being traded at a discounted valuation, at a ratio of 2 times the ratio between the company’s value and earnings before interest, taxes, depreciation and amortization (EV/Ebitda) for 2022 and CSN Mineração (CMIN3) by 2.3 times, taking into account the average price of iron ore expected by the Credit of US$ 144 per ton. Seeing a fair multiple of 5 times to 5.5 times the EV/Ebitda ratio for both stocks, in line with the historical average, analysts see VALE3 and CMIN3 prices pricing an iron ore correction to $80 at US$ 85 a ton in 2022.
Usiminas and CSN, meanwhile, are now trading at 2.5 times and 2.7 times, respectively, the expected EV/Ebitda for 2022, while Gerdau is trading at 5.5 times.
“All are trading below historical multiples that are close to 6 times and our numbers already incorporate a 20-25% drop in average steel prices for 2022 versus 2021.” point out.
In the pulp and paper sector, in turn, Suzano (SUZB3) and Klabin (KLBN11) are being traded at 6.7 times and 8.3 times the EV/Ebitda multiple for 2022. “Assuming a fair multiple for Suzano from 7 times to 7.5 times and from 8 to 8.5 times for Klabin, we see the prices of both stocks in a correction to about US$500 a ton on average for 2022. Hardwood spot prices [celulose de fibra curta] in China they are at US$ 639 a ton”, they point out.
However, even with the roles at multiple attractions, it is necessary to select the shares, according to Ribeiro. “Valuations may seem cheap, but without significant short-term triggers, these stocks are unlikely to receive much investor support. For iron ore, the outlook looks much bleaker than a few months ago. There is no way of knowing whether cuts in steel production in China will continue to apply or whether the government will ease these production restrictions if construction activity increases,” they assess.
Read also: What to expect for the actions of Vale, CSN Mineração and steelmakers with the “new scenario” for ore?
He also points out that iron ore supply is seasonally stronger in the second half, which also bodes ill for prices. “Although construction activity in China tends to recover in August/September and this could lead iron ore to recover a bit, the timing of this recovery is still uncertain [devido ao recente ressurgimento dos casos de Covid-19]. For these reasons, we are less constructive in terms of prospects for extracting iron ore”, says Ribeiro.
In this regard, the analyst points out that Vale and CSN Mineração have the potential for double-digit dividend yields in 2022 but, with iron ore in decline, it is difficult to imagine the shares outperforming the index in the short term.
As for steelmakers, Ribeiro continues to be more constructive, noting that, although he understands that steel prices in Brazil have lost some momentum and that some selective discounts were applied, demand remains very firm and profit dynamics are very strong in the second half of 2021 .
Import parity surcharges have recently returned to between 5% and 10% (in line with normalized levels), which reduces the likelihood of pressure on prices. “Furthermore, the market seems to expect a dramatic drop in steel prices in 2022 (correction of more than 30% from current levels), which at this point seems very aggressive,” he says.
Consequently, Credit sees room for upward earnings revisions as the 2022 consensus estimates look too conservative. Ribeiro highlights that some investors preferred Gerdau recently because it is not a significant exporter of iron ore and due to its exposure to the US market (about 20% to 25% of Ebitda), where the dynamics of supply and demand seem more favorable and the infrastructure package can provide further demand stimulus.
“Although we agree that this makes sense in an environment of falling iron ore prices, in a longer horizon (12 months) we prefer Usiminas and CSN for valuation reasons and because we see flat steel (used in the white goods) surpassing longs in Brazil in this window, as the shortage of semiconductors will be gradually resolved”, he points out. It is worth remembering that Gerdau specializes in the production of long steel used, for example, in civil construction.
The analyst also points out that the benefits of the US infrastructure bill will take time to take effect – “perhaps a story for the second half of 2022 at the very least”.
For pulp stocks, while some were anticipating that a recent improvement in paper demand conditions in China could trigger a potential rebound in pulp prices, Credit is less convinced.
The analyst believes that the incoming offer in the coming months (of around 3.3 million tonnes per year from Bracell and MAPA, from Auraco) should reduce buyers’ receptiveness to further increases.
“Therefore, while we expect relative stability for pulp prices in the fourth quarter, we see pulp prices under new pressure from the first quarter of 2022 onwards. and, consequently, if the real devalues further, Suzano and Klabin may gain some appeal as a currency hedge. However, given the volatility inherent in currency movements, we would not consider this as a significant short-term trigger to justify the jump in these shares now”, says Ribeiro.
It should be noted that, at least for mining companies, the scenario is different for Bradesco BBI, which continues with a positive outlook for both them and for steelmakers, stating that the recent decline in shares created a good buying opportunity, since the fundamentals remain solids.
Itaú BBA, on the other hand, pondered the sector even before the strong debacle of the sector’s shares last week. The bank’s analysts reduced the recommendation for CSN and Usiminas shares from outperform to market perform (perspective of valuation within the market average), noting that the valuation perspectives of CSN and Usiminas do not represent attractive propositions of risk and reward . The target price for CSN went from R$ 61 to R$ 48 and for Usiminas it went from R$ 28 to R$ 24. Gerdau, on the other hand, is the favorite of industry analysts, precisely because it is a company more focused on steel.
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