Companhia Siderúrgica Nacional Q1: Weak Result And Risks Materializing

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Companhia Siderúrgica Nacional (CSN) released weak Q1 2024 results, failing to meet market expectations.The steel segment is doing so badly that the mining segment is already the business that ...

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Monty Rakusen Investment Thesis I recommend selling Companhia Siderúrgica Nacional (NYSE:SID) shares after the 1Q24 results released on May 8th. The company released weak results, and I don't see any triggers for them to improve in the short term. As I said in my coverage start report, the company faces aggressive competition from Chinese steel in the domestic market. Another risk is the high leverage of 3.1x, far above peers that have leverage between 0x and 1x. Review Of Companhia Siderúrgica Nacional Results In 1Q24 The results of Companhia Siderúrgica Nacional failed to meet the already depressed market expectations. Revenues were below consensus by 5.3%, and the company reported a loss in the period. Forecasts (Investing) Now, we're going to talk in detail about the company's results. In my reports, I usually cover revenue, operating results, debts, investments and profit in a sequence. However, Companhia Siderúrgica Nacional is a holding company and has relevant businesses such as mining, steel and cement, so I will comment on how the results were in each of the businesses. Steel - It's No Longer The Holding Company's Main Business It is incredible how the company's division segment is suffering, as the mining segment is outperforming the steel segment, and becoming the largest contributor to the EBITDA.   Breakdown Of The Result By Segment - General and Administrative Expenses (DGA) / Sales Expenses (DGV) (IR Company) Before talking about the numbers, it is worth mentioning that there has been a great evolution since my report on the start of coverage. As I mentioned, there was a big supply problem in the market due to the large amount of steel exported from China to Brazil. And in fact, the Government increased taxation to 25% on Chinese steel, however, the taxation will be applied to only 11 of a total of more than 200 products. Furthermore, the tariff will be only 25% when a certain export quota is reached. The limit established was 30% above the average import of products between 2020 and 2022. In other words, the measures do not meet the expectations of Brazilian producers. It is interesting to note that China's most exported goods to Brazil are flat steel, a product in which CSN is most exposed. This has caused the company to sell products with lower added value, such as its hot rolled coils (HRC). Now talking about numbers, the segment sold 1,086 Kton in volume (+2% q/q; +5.1% y/y). It is interesting to note that the sales volume on the domestic market was 732 Kton, down -4.0% q/q and up +9.0% y/y. However, the annual increase relates to the end of the production bottleneck at the Presidente Vargas plant (RJ), which affected 1Q23. As a result, the division's EBITDA was $47 million, down -29.3% q/q and -68.9% y/y. In my opinion, given the macroeconomic situation and the aggressive competitive environment, there is no trigger for the operation to contribute again to the result in the short and medium term. Mining - It Was Also Bad Companhia Siderúrgica Nacional has a 79.75% stake in CSN Mineração, a company listed on the Brazilian stock exchange, which corresponds to the results of the mining segment. The worsening of results was significant in the mining business, which recorded net revenue of $560 million, falling -43.9% q/q and -31.8% y/y. Ebitda suffered a reduction of -59.3% q/q and -45% y/y, being reported at $223 million. I was already expecting average results, as Vale (NYSE:VALE), the giant Brazilian competitor, had reported an average result. Both companies depend on greater economic activity in China to return to reporting strong results. Logistics And Cement - Finally, The Positive Highlights Logistics was a positive highlight, given the good results in the railway logistics sector and the increase in shipment volume. The Cement division also reported decent results, with EBITDA +6% Q/Q and +25% YoY, with lower costs and price adjustments compensating for weaker volumes. Considerations About The Results In General Overall, I don't believe the company chose the right strategy when diversifying its business. It is worth remembering that the reason CSN has much higher leverage than its peers is due to the acquisition of businesses beyond the steel and mining segment. One example was the acquisition of LafargeHolcim's Brazilian Assets, in the cement segment, and it was there that the company surpassed 3x net debt/ebitda. Although the segments brought less bad results in the current quarter, high leverage in a cyclical sector does not captivate me as a long-term investment. Valuation - Not Attractive At the end of the quarter, the company reached 3.1x net debt / EBITDA, well above its peers Gerdau (NYSE:GGB) and Usiminas (OTCPK:USNZY) which have the same indicator between 0x and 1x. When we look at the P/B indicator of the company and its peers and take an average, there is no upside for share appreciation. On the contrary, there is a 28% premium, so my recommendation is to sell the shares. I feel quite comfortable with the recommendation when I see that Seeking Alpha's Quant Rating and Factor Grades tools point to the same conclusion. Quant Rating and Factor Grades (Seeking Alpha) In other words, I don't see any benefit in buying shares in a company that faces aggressive competition from Chinese steel, has high leverage, and has a higher valuation premium than its peers. Potential Threats To The Bearish Thesis There was little change in the risks to the thesis. The reacceleration of the Chinese economy, especially construction, as if this occurs, a large part of Chinese exports could be redirected to the local market, without contaminating the market dynamics of countries like Brazil. The company's diversification strategy may be correct in the long term. It is worth remembering that Companhia Siderúrgica Nacional has higher leverage than its peers as it has cement, logistics and energy businesses. If the medium and long-term scenario in the Brazilian steel sector is truly greater competition with Chinese steel mills, the company will be able to make profits in other businesses to generate value for shareholders. The Bottom Line The company trades with a 28% premium in its P/B to its peers, and even analyzing the EV/EBITDA multiple, there is no upside potential that justifies a change in recommendation. The risks to the thesis remain the same, as the excess supply of Chinese steel in the domestic market appears far from over. As a result, the company depends on segments such as transport and cement, which are far from being representative of overall results.  Based on this analysis, I recommend selling Companhia Siderúrgica Nacional shares. Investors should pay attention to the aggressive competitive environment, high leverage and little potential for appreciation given the current price.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2439950121"}