Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

Equity, Bottom-up Analyst

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

GrafTech International Ltd / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd (EAF US)</a> is a cheap pure play on graphite electrodes that find most of its usage in producing steel in the electric arc furnace (EAF). 
<ul>
<li>Trading at 7.3x FY21 and 5.6x FY22 PE, with a forecasted free cash flow of over 500 mn USD in 2022 in the very least,  the stock trades at an 18% free cash flow yield.</li>
<li>We believe that the company will use its free cash flow to deleverage as the current net debt on the balance sheet is 1.11 bn USD. With a run rate of 500 mn USD of free cash flow, we estimate the company will be debt-free by 2023.</li>
<li>We believe the company will return the free cash flow to shareholders as the company has no long-term growth plans. With a 50% payout ratio, we forecast a dividend yield of 8-9% in FY23. </li>
<li>The graphite electrode market has solid demand-supply dynamics, with China pledging to go greener and reduce its dependence on iron ore. One of MIIT's stated targets is to have 20% of steel output in China as EAF ( we estimate that as of now, that number is ~10% ).</li>
</ul>
Risks
<ul class="">
<li>Short-term difficulties in the expansion of EAF steel-producing capacity due to high electricity costs and limited scrap supply.</li>
<li>The company has contracts that are priced at 9,900 USD/ton to sell 100k tons of electrodes. The inability of customers to pay would put <a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd's (EAF US)</a> cash flows at risk, and we see this as unlikely since steel prices are high globally.</li>
<li>Controlling shareholder Brookefield Asset Management is selling out. This, we believe, is an overhang on the stock price. </li>
</ul>
With clear guidance on long-term pricing, we can easily see the company making 730 mn USD of EBITDA in FY22. Based on a 6x EV-EBITDA multiple, we can derive a 16 USD share price representing 60% upside from here.

GrafTech International Ltd (EAF US) is a cheap pure play on graphite electrodes that find most of its usage in producing steel in the electric arc furnace (EAF). 

Trading at 7.3x FY21 and 5.6x FY22 PE, with a forecasted free cash flow of over 500 mn USD in 2022 in the very least,  the stock trades at an 18% free cash flow yield.
We believe that the company will use its free cash flow to deleverage as the current net debt on the balance sheet is 1.11 bn USD. With a run rate of 500 mn USD of free cash flow, we estimate the company will be debt-free by 2023.
We believe the company will return the free cash flow to shareholders as the company has no long-term growth plans. With a 50% payout ratio, we forecast a dividend yield of 8-9% in FY23. 
The graphite electrode market has solid demand-supply dynamics, with China pledging to go greener and reduce its dependence on iron ore. One of MIIT's stated targets is to have 20% of steel output in China as EAF ( we estimate that as of now, that number is ~10% ).

Risks

Short-term difficulties in the expansion of EAF steel-producing capacity due to high electricity costs and limited scrap supply.
The company has contracts that are priced at 9,900 USD/ton to sell 100k tons of electrodes. The inability of customers to pay would put GrafTech International Ltd's (EAF US) cash flows at risk, and we see this as unlikely since steel prices are high globally.
Controlling shareholder Brookefield Asset Management is selling out. This, we believe, is an overhang on the stock price. 

With clear guidance on long-term pricing, we can easily see the company making 730 mn USD of EBITDA in FY22. Based on a 6x EV-EBITDA multiple, we can derive a 16 USD share price representing 60% upside from here.

Graftech: Graphite Electrode Play With Debt Deleveraging

<ul>
<li>Since our first bullish note on  <a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd (EAF US)</a> the stock is down -31% due to softer ASP's and cost inflation. We believe these headwinds will persist.</li>
<li>Deleveraging continues with net debt declining from 1.1 bn to 865 mn USD YoY, but the pace has slowed due to negative working capital changes resulting in lower OCF. </li>
<li>Factoring in a 12% drop in ASP YoY, the stock trades at 6.3x FY23 and 4.7x EV-EBITDA, pushing our thesis of debt deleveraging/capital return further out.</li>
</ul>


Since our first bullish note on  GrafTech International Ltd (EAF US) the stock is down -31% due to softer ASP's and cost inflation. We believe these headwinds will persist.
Deleveraging continues with net debt declining from 1.1 bn to 865 mn USD YoY, but the pace has slowed due to negative working capital changes resulting in lower OCF. 
Factoring in a 12% drop in ASP YoY, the stock trades at 6.3x FY23 and 4.7x EV-EBITDA, pushing our thesis of debt deleveraging/capital return further out.


Graftech: Headwinds Persist from Cost Inflation and Soft Pricing Guidance

<ul>
<li>
<a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd (EAF US)</a> reported solid results for Q1 2022. The stock still continues to look cheap at 4.7x FY22 PE.</li>
<li>The debt deleveraging target of 400 mn USD a year seems on track, and the company will be zero debt by FY23. FCF yield is 24% at the current price.</li>
<li>The company also bought back 30 mn USD of stock (3 mn shares @9.88 USD/share representing 1.1% of the outstanding shares) in Q1 2022. </li>
</ul>



GrafTech International Ltd (EAF US) reported solid results for Q1 2022. The stock still continues to look cheap at 4.7x FY22 PE.
The debt deleveraging target of 400 mn USD a year seems on track, and the company will be zero debt by FY23. FCF yield is 24% at the current price.
The company also bought back 30 mn USD of stock (3 mn shares @9.88 USD/share representing 1.1% of the outstanding shares) in Q1 2022. 


Graftech Q1 2022: Debt Deleveraging Continues, LTA Pricing Overhang An Issue

<ul>
<li>
<a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd (EAF US)</a> results for Q4 2022 were worse than expected, and guidance for volumes down 50% in H1 2023e was shocking.</li>
<li>In summary, our intrinsic value was too aggressive, and there was a low margin of safety on the investment. Constant execution issues in a favorable environment didn't help our cause.</li>
<li>The stock isn't as cheap when trading at 11.1x/9.5x FY23e/FY24e. The deleveraging story now gets pushed out to the end of FY25. The investment is dead money for two years.</li>
</ul>



GrafTech International Ltd (EAF US) results for Q4 2022 were worse than expected, and guidance for volumes down 50% in H1 2023e was shocking.
In summary, our intrinsic value was too aggressive, and there was a low margin of safety on the investment. Constant execution issues in a favorable environment didn't help our cause.
The stock isn't as cheap when trading at 11.1x/9.5x FY23e/FY24e. The deleveraging story now gets pushed out to the end of FY25. The investment is dead money for two years.


Graftech: Deleveraging Story Moves Out Even Further / Dead Money

<ul>
<li>
<a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd (EAF US)</a> thesis has taken a turn for the worse with the suspension of the operations in Mexico (impact 50% of production in Q4 2022/H1 2023). </li>
<li>The negotiations of LTA pricing ( based on spot pricing ) in the near term also prove to be a headwind, with spot prices 40% below the contract. </li>
<li>At 7.3x PE FY23 (earnings down 60% YoY), the stock price reflects these challenges. The recovery for the company to normalized cash flow levels will take much longer.</li>
</ul>



GrafTech International Ltd (EAF US) thesis has taken a turn for the worse with the suspension of the operations in Mexico (impact 50% of production in Q4 2022/H1 2023). 
The negotiations of LTA pricing ( based on spot pricing ) in the near term also prove to be a headwind, with spot prices 40% below the contract. 
At 7.3x PE FY23 (earnings down 60% YoY), the stock price reflects these challenges. The recovery for the company to normalized cash flow levels will take much longer.


Graftech: Operational Issues Plague Thesis

United States

GrafTech International Ltd. manufactures and provides natural and synthetic graphite and carbon based products and services. The Company offers graphite electrodes, petroleum needle coke, crystalline form of carbon, and energy solutions for manufacture of steel, aluminum, silicon metal, automotive products, and electronics. GrafTech International serves customers worldwide.

GrafTech International Ltd (EAF US)

Graftech: Graphite Electrode Play With Debt Deleveraging

Trading at 7.3x FY21 and 5.6x FY22 PE, with a forecasted free cash flow of over 500 mn USD in 2022 in the very least, Graftech trades at an 18%...

Sameer Taneja

Graftech: Headwinds Persist from Cost Inflation and Soft Pricing Guidance

Graftech is a play on the graphite electrode industry. Trading at 6.3x FY23 PE and 4.7x EV-EBITDA, the company is a debt deleveraging and capital...

Sameer Taneja

Graftech Q1 2022: Debt Deleveraging Continues, LTA Pricing Overhang An Issue

Graftech is a cheap stock trading at 4.7x PE. Debt deleveraging target of 400 mn USD a year is on track, and the company will be zero debt by FY23....

Sameer Taneja

Graftech: Deleveraging Story Moves Out Even Further / Dead Money

Graftech stock isn't as cheap when trading at 11.1x/9.5x FY23e/FY24e. The deleveraging story with the Monterrey incident gets pushed out to the end...

Sameer Taneja

Graftech: Operational Issues Plague Thesis

At 7.3x PE FY23 (earnings down 60% YoY), Graftechs stock price reflects its production challenges. The stock could be dead money with no resolution...

Sameer Taneja