Stalprofil SA - An asset situation controlled by ArcelorMittal

Hidden values in an unusual babushka structure

Stalprofil (STF) is one of Poland's largest steel distributors, with revenue exceeding 1.7 billion PLN, distributed across the Steel and Infrastructure segments and geographically within the EU (93%) and outside the EU (7%). Its product portfolio includes angle profiles, channel sections, flat bars, hot-rolled steel profiles, hot-rolled angles, cold-formed profiles, etc. STF competes through a wide range of steel products and pre-processing services for added value. (website).

- In a simplified balance sheet, assets consist of 3 million PLN in investments, 288 million PLN in property, plant, and equipment (PPE), and 335 million PLN in net working capital (NWC). These are financed with 4 million PLN in net debt (excluding leasing), 150 million PLN in other liabilities, and 473 million PLN in tangible equity. Among the "other liabilities," leasing/right-of-use is netted, but the most significant item is minority interest of approximately 100 million PLN (see below).

- The stock is priced at 8.3 PLN, with a market cap of 150 million PLN, and is valued at a P/E of 8.4x, EV/Sales of 0.15x, EV/EBITDA of 4.3x, and P/TB of 0.31x (average P/TB is 1x, historically, when valued under P/TB of 0.4x, the stock has risen in 90% of cases in the following year). Since 2004, STF has only incurred operational losses in three full years; 2014 (-8.1 million PLN), 2015 (-10.4 million PLN), and 2016 (-5.3 million PLN), and since 2013, revenue has increased from about 900 million PLN to just over 1720 million PLN. Following a significant NWC release in 1H23, the net gearing is only 4%. At the summer meeting, the major shareholder (see below) approved a DPS of 0.74 PLN (if this is repeated next year - unlikely FY22 was strong - the yield is 9%). STF has a long history of regular dividends in both strong and weak economic times.

- STF owns 60% of the publicly traded Izostal (IZS), which is consolidated in STF. IZS has revenue of 1172 million PLN, divided into the Infrastructure (about 80%) and Steel Processing & Trade (18%) segments. STF came in as a "white knight" when IZS faced financial difficulties in 2005, and in 2011, STF spun off 40% of IZS and raised capital at 7 PLN/share. Since 2006, IZS has posted EBIT profit every year and since 2013, revenue has increased from 323 to 1172 million PLN.

- Izostal (stock price 2.6 PLN) has a market cap of 84 million PLN, TB of 236 million PLN, and is valued at a P/E of 4x, EV/S of 0.15x, EV/EBITDA of 4.1x, and P/TB of 0.36x. If STF makes a bid for IZS at 3.2 PLN/share (23% premium, market cap 105 million PLN), they would gain full access to the minority interest of about 100 million PLN currently in the balance sheet for just over 40 million PLN. STF would then increase TB from 27 PLN/share to 30.4 PLN/share ("adjusted P/TB" 0.28x). Subsequently, the group becomes easier for the market to understand.

- The largest shareholder in STF is ArcelorMittal SA, which, together with two subsidiaries - MZZ ArcelorMittal and Moz NSZZ ArcelorMittal Poland - controls 56% of the capital and 77% of the votes. ArcelorMittal SA (AM) is listed in the USA, Spain, and the Netherlands and has a market value of €20 billion, EV of €26 billion, and is valued at EV/Sales of 0.4x and P/TB of 0.44x. STF represents a negligible part of AM's value, and the obvious thought is that AM should buy out STF. STF makes about 14% of its purchases (50% ten years ago) from ArcelorMittal.

The European steel market is currently characterized by oversupply, rising operating costs, a slowing construction market (consuming 35% of steel in Europe and 40% in Poland), and tough comparatives after very strong years in 2021 and 2022. ArcelorMittal, Stalprofil, and Izostal, however, all appear attractive on the surface for contrarians. Focusing on STF, its history (profit in 15 of 18 years), positive TTM result, and a decent order book suggest that TB is likely to increase marginally going forward. That the P/TB multiple has significant downside is unlikely, rather the opposite - P/TB is now at ATL levels and the tone in forums (focus on larger trends, slowed construction market, etc.) borders on "maximum pessimism". Likely TB growth, likely P/TB expansion, and a "free option" (albeit fairly unlikely) on something structural happening make, in our opinion, the risk:reward sound.

"Appendix": Facilities

Stalprofil's PPE amounts to 288 million PLN, of which buildings and land account for 201 million PLN (acquisition value 266 million PLN). Stalprofil has two warehouses in Dąbrowa Górnicza and Katowice, which are among the largest in Poland. Significant investments in previous years increased warehouse capacity, improved customer service offerings, and ensured high service quality based on ISO 9001:2015 standards. Stalprofil's facility in Dąbrowa Górnicza is according to Google Earth, close to 24,000 sqm. Stalprofil's facility in Katowice is according to Google Earth, close to 28,000 sqm.

Izostal's owned facility of 19,000 sqm (according to the company and Google Earth) in Kolonowskie in southern Poland (production and distribution). PPE is booked at 184 million PLN (of which 10 million PLN is RoU) and buildings and land are booked at 130 million PLN (cost 164 million PLN). The booked value of the land includes "the right of usufruct of land and ownership rights" for 6 land areas, which are booked at "cost" and were purchased in 1997 after a period of hyperinflation. Unfortunately, we have not been able to verify their exact location and price - other than that some of the land is in Krakow.

(Disclaimer: at the time of publication, the writer owns shares in the mentioned company)