O Santander moves away from the market consensus when it comes to the mining and steel industry🇧🇷 Not only the top pick action in basic materials in Latin America it goes against the grain of general preference as the bank also has a buy recommendation (and preference) for a holding company among steelmakers, which generates caution in some analysts.
In between iron ore and steelSantander shows preference for shares of the first category, in the expectation that the prices of the commodity negotiated in the China remain above US$ 100 a ton in the first half of 2023.
For steelmakers, the bank adopted a more selective strategy when choosing stocks for next year. In a report published on Friday (25), analysts Rafael Barcellos and Arthur Biscuola claim that, despite the valuations cheap, there is a lack of catalysts for steelmaker actions in the near term, particularly for flat steel producers.
counts as a top pick
Santander’s first decision “outside market consensus” was to maintain the OK 🇧🇷VOUCH3) as a preference in the base metals sector, even after weak results in the third quarter. According to the institution, despite the recent performance superior to international peers, the entry point and the risk-return ratio remain attractive, considering a good outlook for iron ore prices, a valuation attractive and a yield of 15% cash flow for 2023.
Santander also mentions the potential to unlock value through the base metals division.
For next year, Santander estimates stable Ebitda (earnings before interest, taxes, depreciation and amortization) in the annual comparison, at US$ 20.7 billion. Stronger sales volumes and better cost performance should mitigate lower realized iron ore prices, he assesses.
Santander expects Vale’s iron ore production to reach 320 million tonnes next year, with average iron ore prices of US$100/tonne (up from US$120/tonne in 2022).
The recommendation for Vale’s ADR (American Depositary Receipt) (VALLEY) is “outperform” (expected performance above the market average, equivalent to “buy”), with a price target of US$ 18.
Santander cut the price target of the share of CSN 🇧🇷CSNA3), from BRL 26 to BRL 20 at the end of 2023. However, it reiterated the recommendation of “outperform” (expected performance above the market average, equivalent to “purchase”), given the company’s exposure to iron ore and cement🇧🇷
This is the second movement that goes against the grain of consensus, not least because the bank has preference for the name among steel producers. Despite maintaining the outperform, Santander considers that it is necessary to keep an eye on the holding’s leverage/capital allocation.
Santander projects an annual drop of 22% for the company’s Ebitda in 2023, to R$ 9.9 billion. For the mining division, expected iron ore production is 38mt, up 9% yoy.
Santander also has an outperform recommendation for CSN Mineração 🇧🇷CMIN3), with a target price of BRL 5.
The institution has an outperform recommendation for Gerdau 🇧🇷GGBR4), with a new target price of BRL 36 (against BRL 33 previously), although he believes that triggers are lacking for the asset. The maintenance of the rating is explained by the prospect of more solid results in the coming quarters.
As for the Usiminas 🇧🇷USIM5), Santander downgraded the company’s recommendation to “neutral” and cut the paper’s target price to BRL 9 at the end of 2023.
The update arrives with the adjustment of estimates for the company to reflect results achieved and macroeconomic perspectives.
Analysts assess a weaker scenario for results in the coming quarters, with lower realized flat steel prices mitigating lower costs and high levels of capex (investments) – repair in coking plant 2 and stop for maintenance Blast Furnace 3 in 2023.
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