Parisien-MAGNESITA：WEAK_3Q12;_RAISE_TO_BUY_ON_VALUATION_AND_OUTLOOK-2012-11-14.ppt

,credit,globalmarketsresearch,emergingmarkets,2.5,2.1,957,968,900,172,263 272 275 283,1,451,768,157,126,89,cash st debt 2013 2014 2015 2016+,global emerging markets brazil metal 13 november 2012,magnesita weak 3q12; raise to buy on valuation and outlook magnesita reported disappointing 3q12 results with lower ebitda margins and increased leverage. despite the weak figures, we raise magnesitas bonds to buy from hold based on valuation and on our expectations of improved results in 2013. lower volumes have offset higher prices sequentially, driving revenues 4.6% down magnesitas revenues reached brl608.1m (usd299.9m) in 3q12, up 8.3% yoy and down 4.6% qoq. the annual growth mainly reflects the impact of the brl depreciation, while the quarterly decline is primarily due to seasonality and to lower volumes notably in europe, mirroring the deepening of the european debt crisis. in particular, this drop in volumes has offset higher refractory prices of brl2,119.6/t (+6.0% qoq) and a higher average minerals price of brl179.1/t (+12.3% qoq). refractory revenues totaled brl535.2m (usd262.4m) and continued to represent most of magnesitas revenues, with a total share of 88.0%, followed by revenues from services (7.0%) and minerals (5.0%). of note, revenues from north america have surpassed the contribution from europe, representing 21.6% of magnesitas total revenues in 3q12 vs. 18.1% in 2q12. europe made up 20.0% in 3q12 vs. 22.6% in 2q12. sharp ebitda drop on lower volumes and higher sg&a and raw material costs ebitda dropped 29.0% yoy and 19.9% qoq to brl84.3m (usd41.5m), with margins declining to 13.9% from 16.5% in 2q12 and 15.3% (adjusted for provisions reversal) in 3q11. the annual decrease primarily reflects higher raw material prices, but costs related to the start-up of brumado also impacted margins negatively. on a quarterly basis, the fall was attributable to (1) higher sg&a expenses (+8.5% qoq) on the back of consultancy works and higher external sales, and (2) lower fixed-costs dilution given the reduced volumes that led cogs/t to increase 8.3% to brl1,561/t. positively, gross margins of magnesitas services unit improved to 13.9% in 3q12 from 8.6% in 2q12, largely reflecting a better mix of value added services.,recommendation change research team natalia corfield research analyst (+1) 212 2506135 denis parisien research analyst (+1) 212 250-7568 net debt (brlm) & ltm net leverage (x) 2.8 2.2 2.3 1,060 1,074 3q11 4q11 1q12 2q12 3q12 volume trend (000t) 226 229 213 169 252 3q11 4q11 1q12 2q12 3q12 refractory solutions minerals amortization schedule (brlm),increasing leverage trend could well be reverted owing to brumado and stable fx total debt fell 1.6% qoq to brl1.8bn (usd909.0m), while the companys net debt increased 1.4% qoq to brl 1.1bn. despite relatively stable debt levels sequentially, magnesitas net leverage rose to 2.8x from 2.5x in 2q12 mainly driven by weaker ltm ebitda. the companys liquidity position also declined in the quarter primarily reflecting an increase in short-term debt (std) with cash/std 23 at 6.1x vs. 8.9x in 2q12. nonetheless, in our opinion, it remains comfortable at current levels. in addition, magnesita continues to present a favorable debt maturity profile, with 78.3% of the companys debt maturing after 2016. company officials have also mentioned that net leverage could well drop below 2.5x in the short term. while we believe this might not be achievable in 4q12 given the companys weakened operational results in 2012, magnesitas leverage could for additional risks please refer to p. 2 improve in the next few quarters once brumado starts to operate and as the risks include: higher-than-expected capex due negative effect from the brl devaluation dissipates. just to remind investors, to mineral projects and a slowdown in the brumado is expected to add brl30-40m to 2013 ebitda. brazilian/chinese economies. deutsche bank securities inc. all prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. deutsche bank does and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,13 november 2012,metal magnesita new mineral projects should have low impact on next years capex magnesitas capex came in higher than we expected at brl61.7m (usd30.4m), reflecting the conclusion of the brumado project. this growth, combined with an increase in inventory levels, contributed to another quarter of negative free cash flow generation (usd13.6m). for 4q12, we expect magnesita to be cash flow positive based on managements guidance for a total capex in 2012 of around brl200m (ytd capex is at brl180m). for 2013, official guidance is pending as next years budget is still under discussion, but management indicated that it could be similar to 2012 levels. most importantly, given the announcement of several mineral projects, we understand the projects should have a low impact on next years capex as they are in an exploratory phase. in addition, management indicated that once in a more advanced stage, magnesita intends to finance the projects through partnerships. we raise magnesitass notes to buy from hold based on valuation and on our expectations of improved results in 2013 magnesitas notes have weakened following the announcement of the 3q12 results with the 20s and the perps wider by approximately 25bps and 10bps, respectively. while the outlook for the steel industry remains challenging, we tend to see the price movement as an overreaction based on the following: (1) magnesita continues to show better liquidity than most peers and similar or better ebitda margin and net leverage, (2) the start-up of brumado should bring cost savings that will help the company to improve margins and leverage in 2013, (3) while the companys mineral projects bring some uncertainty, we view magnesitas initiative to diversify its business away from the steel sector as a positive, and the impact on the companys capex should be low in 2013, and (4) once the mineral projects advance, we expect magnesita to join forces with a partner. as such, we raise magnesitas notes to buy from hold as we believe current spread levels more than compensate investors for the risks involved. most importantly, we believe the companys future prospects are positive. the 20s are currently trading 180bps wider than csns 20s, while magnesitas perps are 170bps wider than csns perps. we believe this spread differential could compress to 120bps. figure 1: financial comparison of brazilian steel companies,revenue growth (yoy),ebitda growth (yoy),ebitda mar.,ltm gross lev.,ltm net lev.,cash / std,csn gerdau magnesita usiminas,0.6% 9.5% 8.3% 13.1%,-36.8% -15.0% -29.0% -56.4%,25.2% 10.5% 13.8% 4.4%,6.3x 3.5x 4.7x 11.3x,3.3x 2.8x 2.8x 5.2x,7.3x 1.0x 6.1x 2.3x,source: deutsche bank, company data risks to our recommendation include (but are not limited to): higher-than-expected capex due to mineral projects, a slowdown in the brazilian/chinese economies, a further deepening of the eurozone crisis, fx volatility, and m&a activity. figure 2: outstanding issues,mid,mid,spd,total,issue maggbz 7.875% mar20 maggbz 8.625% perp,amount o/s usd400m usd250m,mdy/s&p/fi b1/bb/n.a. n.a./bb/bb,price 109.50 103.75,yield 6.25 8.38,oas 523 617,z-spread 511 626,to sov 438 538,return 135 109,dur 5.59 11.05,source: deutsche bank, indicative data,page 2,deutsche bank securities inc.,13 november 2012,metal magnesita,valuation trends figure 3: one year evolution of bond prices (usd) 120,118 116 114 112 110 108 106 104 102 100,105 103 101 99 97 95,csn 6.5 20,gerdau 7.0 20,maggbz 7.875 20,csn 7.0 perp,maggbz 8.625 perp,source: deutsche bank figure 4: three months evolution of bond prices (usd),119 117 115 113 111 109 107,106 105 104 103 102 101 100,csn 6.5 20,gerdau 7.0 20,maggbz 7.875 20,csn 7.0 perp,maggbz 8.625 perp,source: deutsche bank figure 5: one year evolution of bond yields (%),8 7.5 7 6.5 6 5.5 5 4.5 4,9 8.5 8 7.5 7 6.5,csn 6.5 20,gerdau 7.0 20,maggbz 7.875 20,csn 7.0 perp,maggbz 8.625 perp,source: deutsche bank,deutsche bank securities inc.,page 3,13 november 2012,metal magnesita,figure 6: three months evolution of bond yields (%),6.5 6 5.5 5 4.5 4,8.5 8.3 8.1 7.9 7.7 7.5 7.3 7.1 6.9 6.7 6.5,csn 6.5 20,gerdau 7.0 20,maggbz 7.875 20,csn 7.0 perp,maggbz 8.625 perp,source: deutsche bank figure 7: one year evolution of libor spreads (bps),650 600 550 500 450 400 350 300 250,700 650 600 550 500 450 400,csn 6.5 20,gerdau 7.0 20,maggbz 7.875 20,csn 7.0 perp,maggbz 8.625 perp,source: deutsche bank figure 8: three months evolution of libor spreads (bps),550 500 450,650 600 550,400 500 350,300 250,450 400,csn 6.5 20,gerdau 7.0 20,maggbz 7.875 20,csn 7.0 perp,maggbz 8.625 perp,source: deutsche bank,page 4,deutsche bank securities inc.,13 november 2012,metal magnesita,figure 9: yield (%) versus duration (years) of 2020 notes mid yield 8.0 jbssbz 8.25 20 7.5 tam 9.5 20 7.0 6.5 maggbz 7.875 20 6.0 fibrbz 7.5 20 5.5 5.0,csn 6.5 20,sbspbz 6.25 20,4.5 4.0,gerdau 7.0 20,5.0,5.2,5.4,5.6,5.8,6.0,6.2,6.4,duration source: deutsche bank figure 10: yield (%) versus duration (years) of perpetual notes mid yield,8.5 8.3 8.1 7.9 7.7,maggbz 8.625 perp,br malls 8.5 perp,cosan 8.25 perp 7.5 7.3 7.1 6.9 csn 7.0 perp 6.7 6.5,11.0,11.5,12.0,12.5,13.0,13.5,duration source: deutsche bank,deutsche bank securities inc.,page 5,13 november 2012,metal magnesita,operating highlights figure 11: magnesitas operating highlights,revenues by product (brlm) refractory solutions minerals services total estimated revenues by location (brlm) south america north america europe asia total volumes by product (000 t) refractory solutions minerals total prices by product (brl/t) refractory solutions minerals cpp contracts by location (brlm) south america north america europe asia total gross profit (brlm) refractory solutions minerals services total cogs (brlm) refractory solutions minerals services total ltm cash conversion (days) cash conversion cycle suppliers inventories,3q10 494.1 35.9 40.6 570.5 3q10 287.6 98.7 122.1 47.4 570.5 3q10 255.9 180.7 436.7 3q10 1,930.6 198.5 3q10 31.0 13.0 6.0 2.0 52.0 3q10 175.7 13.8 5.6 195.1 3q10 -318.4 -22.0 -35.0 -375.5 3q10 193.0 40.0 154.0,4q10 476.9 68.8 42.5 588.2 4q10 296.4 101.8 125.9 48.8 588.2 4q10 264.0 160.7 424.7 4q10 1,806.7 427.8 4q10 33.0 13.0 6.0 4.0 56.0 4q10 148.0 30.7 8.1 186.8 4q10 -328.9 -38.1 -34.4 -401.3 4q10 161.0 48.0 129.0,1q11 495.8 34.5 45.0 575.3 1q11 289.9 99.5 123.1 47.7 575.3 1q11 277.8 130.1 407.9 1q11 1,784.6 264.9 1q11 33.0 14.0 8.0 4.0 59.0 1q11 166.0 13.7 6.0 185.7 1q11 -329.8 -20.8 -39.0 -389.6 1q11 153.0 56.0 129.0,2q11 525.3 21.0 36.7 583.0 2q11 302.0 97.4 118.4 49.6 583.0 2q11 289.9 150.5 440.4 2q11 1,812.0 139.4 2q11 33.0 14.0 8.0 4.0 59.0 2q11 168.4 10.7 4.1 183.3 2q11 -356.9 -10.2 -32.6 -399.8 2q11 146.0 65.0 129.0,3q11 496.7 28.2 36.6 561.5 3q11 290.8 93.8 114.0 47.7 561.5 3q11 262.9 172.2 435.1 3q11 1,889.4 163.5 3q11 33.0 14.0 8.0 4.0 59.0 3q11 160.1 14.2 3.8 178.1 3q11 -336.6 -13.9 -32.8 -383.4 3q11 146.0 76.0 144.0,4q11 516.4 48.6 34.2 599.1 4q11 284.6 115.6 141.4 55.7 598.5 4q11 271.8 226.0 497.8 4q11 1,899.9 214.9 4q11 36.0 14.0 8.0 4.0 62.0 4q11 157.9 21.8 3.3 183.0 4q11 -358.5 -26.7 -30.9 -416.1 4q11 138.0 79.0 138.0,1q12 550.4 25.1 31.3 606.9 1q12 299.8 126.8 126.8 53.4 606.9 1q12 274.9 229.3 504.2 1q12 2,002.6 109.6 1q12 36.0 14.0 9.0 4.0 63.0 1q12 169.6 10.4 1.7 181.7 1q12 -380.9 -14.7 -29.6 -425.2 1q12 143.0 67.0 131.0,2q12 566.9 34.0 36.8 637.6 2q12 320.1 115.4 144.1 57.4 637.0 2q12 283.5 212.9 496.4 2q12 1,999.7 159.5 2q12 36.0 14.0 9.0 4.0 63.0 2q12 183.6 14.8 3.2 201.6 2q12 -383.2 -19.1 -33.6 -436.0 2q12 143.0 69.0 131.0,3q12 535.2 30.3 42.7 608.1 3q12 298.6 131.4 121.6 56.6 608.1 3q12 252.5 169.3 421.8 3q12 2,119.6 179.1 3q12 36.0 14.0 9.0 4.0 63.0 3q12 165.9 13.6 5.9 185.5 3q12 -369.2 -16.7 -36.7 -422.6 3q12 145.0 68.0 136.0,qoq -5.6% -10.7% 15.9% -4.6% qoq -6.7% 13.8% -15.6% -1.4% -4.5% qoq -10.9% -20.5% -15.0% qoq 6.0% 12.3% qoq 0.0% 0.0% 0.0% 0.0% 0.0% qoq -9.6% -8.1% 87.7% -8.0% qoq -3.7% -12.8% 9.2% -3.1% qoq 1.4% -1.4% 3.8%,yoy 7.7% 7.7% 16.6% 8.3% yoy 2.7% 40.1% 6.7% 18.5% 8.3% yoy -4.0% -1.7% -3.1% yoy 12.2% 9.5% yoy 9.1% 0.0% 12.5% 0.0% 6.8% yoy 3.7% -4.2% 56.3% 4.2% yoy 9.7% 19.9% 12.0% 10.2% yoy -0.7% -10.5% -5.6%,ltm 2,168.8 138.0 144.9 2,451.8 ltm 1,203.1 489.2 534.0 223.1 2,450.5 ltm 1,082.6 837.5 1,920.1 ltm 8,021.9 663.2 ltm 36.0 14.0 9.0 4.0 63.0 ltm 677.0 60.7 14.2 751.9 ltm (1,491.8) (77.3) (130.8) (1,699.9) ltm 569.0 283.0 536.0,source: deutsche bank, company data,page 6,deutsche bank securities inc.,13 november 2012,metal magnesita,figure 12: magnesitas operating highlights (cont.),revenues by product (%) refractory solutions minerals services total estimated revenues by location (%) south america north america europe asia total volumes by product (%) refractory solutions minerals total cpp contracts by location (%) south america north america europe asia total gross profit (%) refractory solutions minerals services total cogs (%) refractory solutions minerals services total gross margin (%) refractory solutions minerals services total,3q10 86.6% 6.3% 7.1% 100.0% 3q10 50.4% 17.3% 21.4% 8.3% 100% 3q10 58.6% 41.4% 100.0% 3q10 59.6% 25.0% 11.5% 3.8% 100% 3q10 90.1% 7.1% 2.9% 100.0% 3q10 84.8% 5.9% 9.3% 100.0% 3q10 35.6% 38.5% 13.8% 34.2%,4q10 81.1% 11.7% 7.2% 100.0% 4q10 50.4% 17.3% 21.4% 8.3% 100% 4q10 62.2% 37.8% 100.0% 4q10 58.9% 23.2% 10.7% 7.1% 100% 4q10 79.2% 16.4% 4.4% 100.0% 4q10 81.9% 9.5% 8.6% 100.0% 4q10 31.0% 44.6% 19.1% 31.8%,1q11 86.2% 6.0% 7.8% 100.0% 1q11 50.4% 17.3% 21.4% 8.3% 100% 1q11 68.1% 31.9% 100.0% 1q11 55.9% 23.7% 13.6% 6.8% 100% 1q11 89.4% 7.4% 3.3% 100.0% 1q11 84.6% 5.3% 10.0% 100.0% 1q11 33.5% 39.7% 13.4% 32.3%,2q11 90.1% 3.6% 6.3% 100.0% 2q11 51.8% 16.7% 20.3% 8.5% 100% 2q11 65.8% 34.2% 100.0% 2q11 55.9% 23.7% 13.6% 6.8% 100% 2q11 91.9% 5.9% 2.3% 100.0% 2q11 89.3% 2.6% 8.2% 100.0% 2q11 32.1% 51.2% 11.3% 31.4%,3q11 88.5% 5.0% 6.5% 100.0% 3q11 51.8% 16.7% 20.3% 8.5% 100% 3q11 60.4% 39.6% 100.0% 3q11 55.9% 23.7% 13.6% 6.8% 100% 3q11 89.9% 8.0% 2.1% 100.0% 3q11 87.8% 3.6% 8.6% 100.0% 3q11 32.2% 50.6% 10.4% 31.7%,4q11 86.2% 8.1% 5.7% 100.0% 4q11 47.5% 19.3% 23.6% 9.3% 100% 4q11 54.6% 45.4% 100.0% 4q11 58.1% 22.6% 12.9% 6.5% 100% 4q11 86.3% 11.9% 1.8% 100.0% 4q11 86.2% 6.4% 7.4% 100.0% 4q11 30.6% 44.9% 9.7% 30.5%,1q12 90.7% 4.1% 5.2% 100.0% 1q12 49.4% 20.9% 20.9% 8.8% 100% 1q12 54.5% 45.5% 100.0% 1q12 57.1% 22.2% 14.3% 6.3% 100% 1q12 93.3% 5.7% 0.9% 100.0% 1q12 89.6% 3.5% 7.0% 100.0% 1q12 30.8% 41.4% 5.5% 29.9%,2q12 88.9% 5.3% 5.8% 100.0% 2q12 50.3% 18.1% 22.6% 9.0% 100% 2q12 57.1% 42.9% 100.0% 2q12 57.1% 22.2% 14.3% 6.3% 100% 2q12 91.1% 7.4% 1.6% 100.0% 2q12 87.9% 4.4% 7.7% 100.0% 2q12 32.4% 43.7% 8.6% 31.6%,3q12 88.0% 5.0% 7.0% 100.0% 3q12 49.1% 21.6% 20.0% 9.3% 100% 3q12 59.9% 40.1% 100.0% 3q12 57.1% 22.2% 14.3% 6.3% 100% 3q12 89.4% 7.3% 3.2% 100.0% 3q12 87.4% 3.9% 8.7% 100.0% 3q12 31.0% 45.0% 13.9% 30.5%,qoq -90.24 -34.15 124.39 0.00 qoq -115.03 348.19 -262.26 29.10 0.00 qoq 275.21 -275.21 0.00 qoq 0.00 0.00 0.00 0.00 0.00 qoq -162.39 -1.00 163.39 0.00 qoq -53.47 -43.92 97.40 0.00 qoq -4.3% 2.9% 61.9% -3.5%,yoy -46.8 -3.0 49.8 0.0 yoy -270.0 490.0 -30.0 80.0 0.0 yoy -55.6 55.6 0.0 yoy 121.1 -150.7 72.6 -43.0 0.0 yoy -42.4 -64.5 106.9 0.0 yoy -45.1 31.7 13.5 0.0 yoy -3.8% -11.1% 34.0% -3.8%,ltm 3.5 0.2 0.2 4.0 ltm 2.0 0.8 0.9 0.4 4.0 ltm 2.3 1.7 4.0 ltm 0.6 0.2 0.1 0.1 1.0 ltm 3.6 0.3 0.1 4.0 ltm 3.5 0.2 0.3 4.0 ltm 31.2% 44.0% 9.8% 30.7%,source: deutsche bank, company data,deutsche bank securities inc.,page 7,0,13 november 2012,metal magnesita,summary financials figure 13: summary financials (brlm),income statement (brlm) total revenues cogs gross profit gross margin gross interest expense sg&a cash flow (brlm) ebit ebitda ebitda margin change in wc change in net wa broad ocf (w chg in nwa) net interest paid net capex acquisitions cash dividends paid broad free cash flow (fcf w chg in nwa net change in debt net cash generation balance sheet (brlm) s-t debt l-t debt total debt cash and cash equivalents net debt credit ratios interest coverage ebitda-capex/interest s-t debt/tot debt cash/s-t debt run-rate gross leverage total debt/ltm ebitda (x) run-rate net leverage,3q11 561.5 (383.4) 178.1 31.7% (43.4) (121.2) 3q11 89.6 118.7 21.1% (2.9) (1.2) 119.8 (22.0) (39.4) - - 37.9 121.3 161.0 3q11 125.6 1,631.8 1,757.3 857.2 900.2 3q11 2.73x 1.83x 7.1% 6.83x 3.70x 4.12x 1.90x,4q11 599.1 (416.1) 183.0 30.5% (43.8) (127.8) 4q11 53.0 111.8 18.7% (26.5) (23.2) 135.0 (27.2) (84.1) - (9.4) 2.9 (29.6) (23.4) 4q11 124.8 1,602.9 1,727.7 770.5 957.3 4q11 2.55x 0.63x 7.2% 6.17x 3.87x 4.04x 2.14x,1q12 606.9 (425.2) 181.7 29.9% (39.8) (115.4) 1q12 61.7 87.6 14.4% 30.6 20.0 67.6 (25.7) (55.7) - - (30.8) (92.6) (134.0) 1q12 90.8 1,544.3 1,635.1 667.0 968.0 1q12 2.20x 0.80x 5.6% 7.35x 4.67x 3.88x 2.76x,2q12 637.6 (436.0) 201.6 31.6% (44.3) (116.0) 2q12 78.3 105.3 16.5% 27.3 36.5 68.8 (34.6) (62.4) - - (46.2) 237.5 200.5 2q12 91.3 1,781.2 1,872.6 812.5 1,060.0 2q12 2.38x 0.97x 4.9% 8.90x 4.45x 4.42x 2.52x,3q12 608.1 (422.6) 185.5 30.5% (39.0) (125.9) 3q12 56.4 84.2 13.8% 15.6 26.5 57.8 (29.3) (61.7) - - (45.4) (30.6) (65.1) 3q12 125.7 1,716.3 1,842.0 767.6 1,074.4 3q12 2.16x 0.58x 6.8% 6.11x 5.47x 4.74x 3.19x,qoq -4.6% -3.1% -8.0% (111.67) -11.9% 8.5% qoq -28.0% -20.0% (266.62) -43.1% -27.6% -16.0% -15.4% -1.1% nm