Jefferies bullish on Ferroglobe

Rating  BUY

Price Target $18.25 (from  $16.75)

Price $15.75

Key Takeaway

GSM’s 3Q17 EBITDA of $56M beat, lending credence to its pricing leverage. With 2018 Si contracts settling above index, and spot improving, it should lift earnings next year, however, inflationary costs will provide a partial offset. Post results, we raise estimates while cognizant of TBD cost headwinds, reiterate our Buy and increase our PT to $18.25 (+$1.50).

Earnings Beat Expectations: GSM reported adjusted 3Q17 EPS of $0.05 that was ahead of our $0.01 estimate and consensus of $0.03. Adjusted EBITDA of $56M exceeded our $43M forecast as well as consensus of $44M. Adjusted EBITDA excluded $1.98M associated with business interruption and included $3.757M of valuation adjustment associated with Globe’s purchase price.

Strong Operating Results Despite Disruptions: GSM’s revenues of $452M beat (+2%) on better volumes (+1%) and metals ASP’s (+2%), partly offset by lower other revenue. Lower COGS also contributed to the operating beat driving gross margins of 40.8% +204bps ahead of forecast, despite two alloys facilities experiencing unexpected production interruptions adversely impacting volumes (with issues since resolved). Other below the line items only partly offset the operating beat, translating to higher than expected income.

Higher Pricing into 2018, but Not without Cost Inflation Headwinds: GSM has secured close to 60% of its expected 2018 Si sales under contract with a 50/50 split between variable/fixed in both the US & EU. The remaining book is likely more bias toward fixed contracts. Thus far, GSM has settled around $1.40/lb for US contracts and $1.20-1.21 for EU. Marking to market, GSM’s annualized EBITDA would approximate ~$400M, however, inflationary cost pressures will provide headwinds into next year. It expects higher electrode costs to add approximately +$10-20M in 2H18, and it’s facing higher electricity (specifically France) and possibly coal too, with the total headwinds TBD.

Estimate Revisions: We increase our 4Q17 EBITDA to $57M (+$12M) and 2018 to $385M (+$27M) on FX, price & volumes (ex-Glencore Mn assets). Valuation/Risks

Valuation: GSM trades at 7.8x 2018E EV/EBITDA versus its historical 8.7x median (5-13x range) and the US steel sector at 5.5x. The pending Mn asset acquisition may add up to $80M EBITDA currently excluded from our estimates (pg. 2). Our $18.25 ($1.50) PT implies 9.0x 2018E EV/EBITDA.

Risks: a) Si metals pricing, b) capacity additions, & c) FX.

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