An integrated steel company that is criminally undervalued
Companhia Siderúrgica Nacional is a Brazilian corporation incorporated in 1941. The Presidente Vargas Steelworks, located in the city of Volta Redonda, in the state of Rio de Janeiro, began its production of coke, pig iron and steel products in 1946, when they also incorporated the Casa de Pedra mine, located in the city of Congonhas, state of Minas Gerais, and the Arcos mine, located in the city of Arcos, state of Minas Gerais. The Casa de Pedra mine assures self-sufficiency in iron ore and the Arcos mine provides limestone and dolomite.
CSN was privatized through a series of auctions held in 1993 and early 1994, through which the Brazilian government sold its 91% ownership interest. The company began trading on the NYSE in 1997. It has a market cap of ~$6.1B with a share price of $4.46 at the time of writing.
CSN is currently one of the largest integrated steel producers in Latin America in terms of crude steel production, they produced 11.3% of Brazil’s total crude steel production in 2020. They operate throughout the entire steel production chain, meaning they do everything from mining the ore to the sale of steel products. Their business can be separated in five segments: steel, mining, cement, logistics and energy.
CSN’s current annual crude steel capacity at their main facility is about 5.6 million tons. With an additional production capacity of 1.1 million tons of steel at their long steel segment in Germany. They obtain all their iron ore (and other products) from their own mines.
As previously mentioned, CSN obtains all their iron ore from their own mines. However, they sold 29.6 million tons, 34.9 million tons and 26.9 million tons of iron ore to third parties in 2018, 2019 and 2020, respectively. Their mines are strategically located within Brazil’s “Iron Ore Quadrangle” within the state of Minas Gerais.
CSN holds stakes in and operates many business that operate in transportation of goods. They operate a port terminal for containers, called TECON. They also have participation in 3 railways.
CSN entered the cement industry in 2009 to take advantage of the synergy potential with their steelmaking business. They have gradually invested in their cement segment, with the most recent being the acquisition of the Brazilian business of LafargeHolcim for $1 billion. They also acquired Elizabeth Cimentos for a value of $214 million in July of this year.
Steelmaking requires significant amounts of electricity to power rolling mills, production lines, hot metal processing, coking plants, cryogenic plant and auxiliary units. They produce most of the electricity from a power-plant at their main facility which secures them about 235 MW of capacity. In addition, they secure on average 188 MW through various equity interests.
CSN isn’t a fancy EV company with revenue growing 1000% YOY, however they are growing fast compared to peers. Their earnings per share (EPS) has grown at an annual 38.3% over the past 5 years. They are also investing profits back into their own business through acquisitions. The insiders of this company are focused on growing the company considering they have a 54.5% stake.
Some statistics about the valuation of CSN:
P/Free Cash Flow: 2.68
Return On Equity: 117.7%
Return On Assets: 22.3%
Return On Investment: 11.1%
This company has a price to free cash flow of 2.68. Which means with no growth at all it will have made its own market cap in profits in a little more than 2,5 years. They are also investing back heavily into their own business.
The average company in the steel-making industry has a P/E of 5.88, even though this isn’t a full-on steel company it is still noteworthy that it is trading at a P/E that is nearly 3 times lower than their main industry average. If we would value CSN at a P/E of 5.88 we would obtain a price of $11.88 indicating an increase of over 166%.
The estimated CAGR of the steel industry in the next 5 years is 4%, if we do a simple DCF analysis, with the assumptions of 4% growth over the next 5 years and a 2% growth rate in the years after, we get a fair enterprise value of $22.9B, compared to the current EV of $8.48B. This would also indicate a share price of around $12.00 (specifically $12.04).
The stock of CSN ($SID) has been more than cut in half in the recent months. This creates a wonderful buying opportunity for investors looking for value and growth. If you are interested in this company I would encourage you to read the 20-F (10-K for foreign companies) for yourself and decide if this is a good investment. After all I am just an individual and not a hedge fund, have fun investing!
Disclaimer: Not investment advice