Algoma steel Update (All Canadian dollars)

If you didn’t see my first post a few months back, here is my writeup: https://drive.google.com/file/d/1IVId0jgge8ugj2JuU34pHdxM0dkuDYYB/view

As of market close today, Algoma Steel reported a beat in earnings compared to their guidance they gave at the end of the quarter knowing it would take a while for them to report

Here are the highlights: • 47.9M in adjusted EBITDA at a 7.1% margin (beat guidance of $25M-$30M) • Revenue of 677.4M (1%-3% off my estimate so thats a win) • OCF of $95.4M (NWC change of 52M due to over $200M in inventory liquidation which was expected and is nice to see) • 571k in shipments with that being a nice 10k beat likely due to inventory liquidations being better than expected (they definitely were)

Events that occurred: • Increasing of budget for EAF transformation by 125M-175M but that should be it, and compared to next quarter’s cash flow, it is minor lol with contingency still being baked into the budget • Start-up activities moved from mid-2024 to end-of-year 2024 with commissioning now expected in Q3 2025 for EAF • Plate Mill Modernization set for April 2024 which is nice to see a set date with expected inventory buildup for the 40 days off • Definitive date of 2030 for phase 3 connection to full grid, though first phase was approved so neutral on this front

Guidance for Q2 2023: • Adjusted EBTDA of 170M-180M • 550k-560k

Opinion on Results & Guidance: Basically, 3 months ago they guided a lighter EBITDA so this was a nice beat along with great inventory reduction. I do wish utilization for the next quarter would be more like 575k but its good enough. The fact is that I already estimate 835M in steel revenue (880M total revenue) for Q2 2023 through basic steel price modeling equivalent to a 20% EBITDA margin. Because modeling costs is harder, i was expecting more in the 25%-30% range but my expectations were wide at 150M-250M, so this being guided is definitely nice to see. Also considering the current prices, though Q3 prices have barely started, I would say EBITDA is in the wide range of 50M-125M.

The fact is at Q2 2023 EBITDA annualized, Algoma trades at a 1.31x EV/EBITDA multiple with no other steel company being as close to as low. We can even assume things go to shit and they break even, that would be a 5x 2023 EBITDA in essentially the worst case.

No other steel stock trades at this low of a multiple. I mean look at their Canadian peer Stelco which had a slightly higher 9% EBITDA margin, a smaller gap than usual which shows algoma steel is becoming more efficient. StelCo trades at almost a 100% premium on an EV/EBITDA basis, a pair trade may be attractive at these valuation levels and due to the closing efficiency/utilization gap.

Also, just to add, this 175M of EBITDA converts to roughly 120M in FCF excluding growth capex (EAF/plate) and CNWC (should be positive anyway), or an annualized FCF yield of almost 50%!!