GrafTech International Ltd

EAF Details

GrafTech International Ltd (NYSE: EAF) is engaged in the business of manufacturing graphite electrode products essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals.

Q2FY21 Result Performance (For the Second Quarter Ended 30 June 2021)

• The company has recorded 17.8% YoY growth in its net sales to $330.75 million supported by 39% YoY and 16% QoQ growth in sales volume to 43 thousand MT. Production volume grew 22% QoQ and 33% YoY to 44 thousand MT.
• Adjusted EBITDA grew by 6% YoY to $160 million and adjusted EBITDA margin stood at 48%.
• Net income stood at $28 million, including one-time Change in Control charges (pre-tax) of $88 million due to the reduction in the ownership of its largest stockholder, Brookfield, to below 30% of its overall shares outstanding. However, adjusted net income stood at $114 million.
• It has cash and cash equivalents of $114 million and total debt of around $1.2 billion as of June 30, 2021.

Key Data (Source: Company Reports) 

Recent Update

• The company, on 26 July 2021, opened a new sales office in Chiba-shi, Japan that would provide local commercial, customer service and technical support to its local customers. This office has also aided in expanding its global sales and technical support personnel.
• The board of directors of the company on 4 August 2021, declared a quarterly cash dividend of $0.01 per share to stockholders, which would be paid on 30 September 2021.

Key Risks

The company’s operations are exposed to the legal, compliance, economic, social and political risks related to its substantial operations in multiple countries. The business and the selling prices of its products are cyclical and that could lead to lower profitability and net losses in the future. Fluctuation of foreign currency exchange rates and dependence on the supply of key raw materials also remains potential risks.

Outlook:

The management of the company continues to witness improvement in the global steel market, which has enabled the company in posting robust sequential and year-over-year performance across key metrics in Q2FY21. The company is enthused by the industry’s sustained recovery for the rest of the year and the positive anticipated impact on the business going forward. In Q2FY21, the company has fast-tracked its production capabilities to cater to the rising customer demand due to the growth in the graphite electrode market. Meanwhile, the company expects further improvement in reported non-LTA pricing in H2FY21 as well as in 2022. Moreover, the company is well-positioned for success in this improving market.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Analysis

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The stock posted 3-months and 6-months returns of ~-12.22% and ~-17.63%, respectively. It is currently trading above the average 52-week high price of $14.165 and the 52-week low price of $5.87.

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). The company might trade at a slight discount to its peers’ average, considering reduced cash flow from operations in Q2FY21 as well as a significant decline in ROIC to 2.4% in Q2FY21 versus 7.1% in Q2FY20, and a longer cash conversion cycle at 127.1 days in Q2FY21 versus an industry median at 76.9 days.

Considering the aforementioned factors, a “Buy” recommendation has been assigned on the stock at the current market price of $10.70 per share, up by 1.81% on 9^th September 2021. 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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