Goldman Sachs (NYSE:) recently conducted an analysis of ArcelorMittal SA’s (NYSE:) strategic moves in optimizing its asset portfolio by divesting low-yield assets and investing in high-growth regions, focusing on downstream value-added steel products while enhancing the quality of its upstream steel and iron ore operations.
However, this realignment is accompanied by increased capital expenditure (capex) over the next few years, potentially pressuring free cash flow (FCF). Additionally, MT faces challenges from pricing pressure due to low-cost imports and sluggish industrial demand in Europe, its largest division.
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Despite MT’s comparable margin and sales growth to US peers, along with better yields and attractive longer-term growth plans, it is trading at a significant discount of 3.4x NTM EBITDA compared to international peers at 6-7x. While the focus on growth aligns with long-term strategy, uncertainty remains whether investors will appreciate this amid a subdued operating outlook in the near term.
Goldman Sachs forecasts elevated capex and minimal FCF in 2024, potentially extending the buyback program. Consequently, yields are expected to fall to 3% over the medium term, higher than international peers (1-2%) but below European peers (4-6%). However, a faster recovery in Europe or increased market protection could present upside to forecasts.
Initiating coverage at Neutral, Goldman Sachs assigns a 12-month price target of €26.6 (ADR $29.6), blending 1x NAV and 3.7x EV/EBITDA. Despite trading at a discount to NAV, investors may be hesitant to value MT based on longer-term growth prospects.
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MT’s transition from shareholder returns to growth entails higher capex and lower FCF generation, potentially impacting further buybacks that have been integral to its yield story. While strategic growth opportunities exist in focus geographies, such as India and the US, the market currently undervalues growth prospects, largely due to cautious sentiment towards Europe.
Goldman Sachs acknowledges the potential for a re-rate if the European business demonstrates improved operating performance. However, a material re-rate within a 12-month horizon seems unlikely without a turnaround in the European market, expected in late 2024 or early 2025.
Margins are anticipated to remain flat in the near term, with EBITDA margins declining into the JunQ before picking up later in 2025. pricing outlook varies across regions, influenced by factors like low-cost imports, input costs, and restocking activity, with potential upside risks in certain markets.
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X (formerly, Twitter) – Aayush Khanna
