The metal market is a really cyclical market and producers and buyers must take care of probably huge value swings. The total sector loved a large tailwind within the post-COVID period however metal costs have come down by fairly a bit up to now few quarters. While Ternium (NYSE:TX), my favourite Mexico and Argentina centered metal producer, is unquestionably seeing and feeling the influence of a deteriorating market, its very sturdy steadiness sheet provides further safety. Earlier this yr the query wasn’t “if” however “when” the metal market and metal producers would see a correction.
While margins are being compressed, Ternium’s monetary efficiency stays sturdy
During the third quarter, the corporate produced 2.97 million tonnes of steel, which is a 3% lower in comparison with the third quarter of final yr whereas the output remained just about unchanged on a QoQ foundation. The metal value has been lowering for some time now, and this implies the EBITDA margins are being compressed. While the corporate generated an EBITDA margin of $414/t within the second quarter and even $612/t within the third quarter of final yr, these margins collapsed to 16% of the income for a complete EBITDA of $679M.
Of course, that also is an honest end result, and as you possibly can see under, Ternium undoubtedly remained worthwhile. Total revenue in the third quarter came in at $4.1B and regardless of the upper COGS, the gross revenue was nonetheless fairly respectable at $800M. The working revenue fell to $526M and the pre-tax revenue fell by nearly 80% though there clearly is a $175M swing within the contribution from equity accounted investees whereas there additionally was a $66M swing within the “other financial expense” which is principally associated to FX adjustments.
That additionally explains why the common tax charge was so excessive as a few of the bills are usually not (instantly) deductible. About $153M of the $220M in reported internet revenue was attributable to the shareholders of Ternium and this represents an EPS of $0.078 per share. Every share of TX represents 10 underlying shares which suggests the EPS for the US-traded stock was $0.78.
My earlier funding theses had been primarily based on the free money stream profile of Ternium, so it solely is sensible to evaluate the corporate primarily based on its free money flows. As you possibly can see under, the overall reported working money stream was $1.03B. However, this included a $548M contribution from adjustments within the working capital place and excluded $12M in lease funds. This implies that on an adjusted foundation, the working money stream was roughly $474M.
The complete capex was simply $136M which suggests the adjusted free money stream within the third quarter was roughly $338M. A portion is attributable to minority pursuits and making use of the identical ratio because the attributable internet revenue, the attributable free money stream end result was roughly $235M. This seemingly underestimates the attributable free money stream as even the attributable internet revenue in Q3 2022 was comparatively low vs. earlier quarters and years. While Ternium doesn’t present a breakdown of how a lot of the free money stream was attributable to the minority pursuits, I suppose the $235M I talked about is on the conservative facet of the spectrum, and primarily based on earlier years I’d argue the quantity seemingly is nearer to $275M.
But simply to err on the cautious facet, I will use the $235M. Divided by 196 million ADS at present excellent, the underlying free money stream per share was roughly $1.20. And that’s nonetheless a good end result.
The steadiness sheet
One of the principle the reason why I was by no means too anxious about Ternium is its wonderful steadiness sheet. As of the tip of September, the corporate had about $1.5B in money and a further $1.27B in different investments. Meanwhile, the overall gross debt got here in slightly below $1.1B leading to a complete internet money place of roughly $1.7B. That’s roughly $8.5 per ADS (though a few of that internet money seemingly is attributable to the minority pursuits) and it goes with out saying this exceptionally strong steadiness sheet will assist Ternium to get via tough occasions. It’s undoubtedly not the one firm within the sector with a internet money place, however the dimension of the money pile is fairly enticing.
This additionally means the upcoming dividend cost of $0.90 per ADS (payable on Nov. 17) will barely make a dent within the internet money place.
While the online revenue and underlying free money stream nosedived in comparison with a yr in the past and even final quarter, we are able to’t say Ternium is extremely costly (though the share value has already put in a robust efficiency, stronger than I anticipated in my August article).
The excessive internet money place acts as a cushion in opposition to market volatility and that seemingly helps to clarify why Ternium’s share value is holding its floor. I’m contemplating writing out of the money put choices however I’m in no rush as I have already got publicity to the metal market with Algoma Steel (ASTL). The choice writing technique on Ternium has served me effectively up to now and that can seemingly be my method this time as effectively.