Buy low with RHI Magnesita

By Alex Janiaud

The rock-bottom score of shares in RHI Magnesita (RHIM) exist with some good cause, however we predict the mix of self-help, debt discount and a bottoming out in demand in its finish markets may immediate the shares to rise.  

RHI Magnesita is the world’s largest producer of refractories. The merchandise it makes embrace heat-resistant linings for furnaces and kilns, in addition to an unlimited array of merchandise to regulate the movement of molten steel, reminiscent of side-gates, nozzles and plugs. The corporate was fashioned in 2017 via the mega-merger of RHI and Magnesita Refratarios, which gave the group sturdy positions in Europe and South America, in addition to bringing a raft of cross-selling and cost-saving alternatives.

Whereas the enlarged group can lay declare to having made operational progress, the exterior buying and selling surroundings has not been variety. Specifically, the slowing international financial system and hassle within the European automotive sector has made for a weak metal market, which is the place RHI generates 70 per cent of gross sales. Nevertheless, the corporate’s metal enterprise has managed to mitigate a number of the weak spot in Europe, which noticed a 12 per cent first-half gross sales decline, with progress in Asia, which grew 9 per cent because of market share features and the advantage of a shift in direction of greater high quality metal, significantly in China and India. General first-half metal income fell Three per cent and gross income dropped 5 per cent. RHI’s different markets have been extra encouraging. These embrace offering refractories for non-ferrous steel smelting and different high-temperature industrial processes, reminiscent of brick making. These operations grew half-year turnover by 12 per cent and additionally elevated market share, regardless of some weak spot in Europe and North America.

There are hopes that higher instances may lie forward for steelmakers, with progress in US/China commerce talks probably offering a lift for industrial demand. However, no matter this, RHI has loads of potential for self assist. That is partially all the way down to the breadth of its operations. The corporate is concerned all through the refractory provide chain. It mines key refractory uncooked supplies magnetite and dolomite, and is 50 per cent self-sufficient via its 10 mines. And in addition to manufacturing merchandise, the corporate handles logistics and distribution.

It additionally affords planning and commissioning companies to clients, and is concerned in disposal – and, more and more, recycling. Whereas this vertically built-in mannequin could make the enterprise extra delicate to adjustments in demand and uncooked materials costs, it additionally offers the group extra management over the price base and extra scope to seek out efficiencies. This has aided a cost-cutting drive because the merger, which is anticipated to take annual financial savings to €110m this yr, up from €80m. As well as, a €15m enhance is anticipated from addressing operational points at 4 vegetation. And the corporate is benefiting from lately applied worth rises that clients have reportedly responded effectively to. 

Debt has additionally dropped markedly because the merger, from €936m to €611m as of mid-2019. That is equal to 1.1 instances money revenue, which is contained in the goal vary of zero.5 to 1.5 instances. That stated, web debt does should be seen in gentle of a €337m pension deficit and different personnel provisions of €82m that mainly relate to Austrian termination-benefit guidelines. There’s additionally an extra €150m of stability sheet provisions that primarily relate to drawback contracts. 

Importantly, although, the corporate believes there’s room for substantial additional enchancment. A brand new €40m cost-saving plan is beneath approach. This may assist the group in direction of a focused annualised money revenue enchancment of €70m-€80m by 2022. Different initiatives embrace pushing extra higher-margin “options” gross sales and creating know-how to observe buyer plant efficiency higher. The price of the brand new profit-improvement drive has been put at €220m over the subsequent two years, however one-third of that is anticipated to be financed by decreased working capital. 

A more healthy stability sheet can also be serving to the enterprise broaden via acquisitions. On the time of writing, RHI Magnesita is in discussions over an acquisition of Turkish mine Kumas Manyezit Sanayi, which mines magnesite ore merchandise. The Competitors and Markets Authority (CMA) has, nevertheless, opened an investigation into the deal.