AUGUST 17, 2021 8:00 AM

Gerdau expects strong steel demand by the end of the year

buy

Gerdau's quarterly financials (BBB- / Baa3 / BBB-) exceeded market expectations. Consolidated EBITDA in Q2 was $ 1.1 billion, up 42% qoq and 3.6 times yoy, while EBITDA margin reached 31%. Net debt, including leases, increased $ 149 million from the previous quarter to $ 2.2 billion. In local currency, EBITDA rose to 5.9 billion reais, lagging the currency indicator due to the strengthening of the Brazilian real. Nevertheless, the indicator grew by 37% qoq and 3.5 times yoy. Gross and net leverage declined on the back of EBITDA growth of 0.5x and 0.3x to 1.2x and 0.8x, respectively.

YTM


2.4%

RISK


BBB- / Baa3 / BBB

DURATION


5.4

Management gave a good outlook for 2H21. Management expects strong demand in 2H21 across all geographic markets as global economic activity continues to recover. Management expects stability in the future and further increase in margins primarily due to lower costs, rather than further growth in product prices. Overall, the company expects strong 2H21 results. Despite this, the management does not plan to increase dividends and will keep them at the current level of 30% of free cash flow. The company has an internal corporate goal for the second half of the year - to reduce gross debt to 15 billion reais (15.8 billion reais in 2Q21), to maintain net leverage at the level of 1-1.5x. We have a positive view on the issuer's credit profile. Among Gerdau Eurobonds, we like the issue with maturity in 2027 (ISIN-USG3925DAD24), which has an annual coupon of 4.875%. The securities are traded with a dollar yield of 2.4% per annum with a duration of 5.4 years.

Gerdau would like to nail down South America's steel industry. The company is a major producer of long steel in the Americas, and one of the world's largest suppliers of special steel. Part of the Gerdau is controlled by Metalúrgica Gerdau (which is controlled by the founding Gerdau Johannpeter family). The company produces more than 20 million tons of long steel annually and sells its products, which include bars, beams, rebar, and piling, to customers such as auto parts makers, construction contractors, and agricultural companies. Gerdau has operations in around 10 countries in the Americas, Europe, and Asia and generates about 40% of sales in its home country.