More upgrades strong FCF remain underappreciated - Buy
European margins remain more robust than at any time post Lehman. Althoughthis is not what the shares are priced for, we continue to see a scenario wherethis strength lasts or margins expand even further. Hence, we lift numbers againby 6-7% for 2018-19E (6-15% above Street EBITDA) but see another 20% upsidepotential if spot trends last and 45% upside potential for the equity in a moreoptimistic scenario (vs. 22% in our base case). MT′s shares have made moneyin H1 in each of the past 15 years and with strong cash generation (9-11% FCFyield in our base case scenario) and Street upgrades likely to crystallize over thecoming quarters and 5.5x EV/EBITDA (vs. peers at 6.5x), we reiterate Buy.
Owning MT in H1 has usually been a good trade = timing favorable
H1 is usually the strong season in steel (seasonal demand, restocking, pricedynamic) and this has been reflected in MT′ share price. On average, MT delivered36% (median 26% vs. peers 16%) performance at some point in H1 over thepast 15 years with H1 peaks usually being skewed into May/June. Supported byfundamental factors, we believe it is the right time to own the stock.
Strong fundamentals last and imply more upside potential to estimates
Given the fragility of past cycles, the market is wary on the sustainability of thestrong spot margins in Europe. We believe spot EBITDA is close to USD11bn(vs. DB at USD9.0bn, Street at USD8.4bn in 2018E). Nevertheless, we see a fewreasons why prices and margins may continue to move up: 1) Chinese productioncuts stick and Chinese prices are at multi-year highs and above European levels(a situation rarely seen in the market), 2) demand leading indicators remainsupportive and 3) European consolidation is underway and may support marginsfurther. Additionally, the high-margin Brazilian market has just begun to stabilizepost its recession and has scope to recover, and the US market could benefitfrom i……[德意志银行]