We lower Gerdau’s 2009E EBITDA by 18% and EPS by 60% following 4Q results, and
to reflect a weaker outlook for the North American business (mainly price and volumes)
and lower long steel demand in Brazil. Our 6-month price targets decrease to US$4.0
(from US$6.8) for GGB, to R$10 (from R$16) for GGBR4 and to R$8 (from R$13) for
GGBR3. Our Sell rating is unchanged, based on the significant valuation premium to
local peers, large exposure to foreign steel markets, and high leverage.
Implications
We now forecast a 15% yoy decline in long steel demand in Brazil. We expect the
company to cut 2009 capex to US$700mn from US$1.7bn, leading expansions to be
postponed by two years on average. Gerdau shows the highest leverage among LatAm
steel companies with 3.3X year-end 2008 net debt to 12 month forward EBITDA. On this
basis, there is not much leeway below one of the debt covenants linked to the US$2.7bn
debt raised to buy Chaparral Steel (total debt to LTM EBITDA should be lower than
4.0X). Gerdau had R$5.5bn in cash at end-2008 and R$3.4bn debt maturing in 12 months,
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conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment
decision.
Gerdau S.A. Steel
but if the debt covenant were to be broken an additional R$6.1bn could have to be paid or
renegotiated in the short term.
Valuation
GGB trades at 5.9X 2009E EV/EBITDA, representing a premium of 31% to its LatAm steel peers.
Gerdau’s steel business ex-North America is being priced at 5.5X EV/EBITDA. The Brazilian steel
business represents 74% of total 2009E EBITDA, up from 59% in 2008. Our price targets continue
to be based on a blend of DCF value (30%) and EV/EBITDA (70%).
Key risks
Key upside risks to our view and price target are a stronger than expected recovery in US and Latin
American steel markets.
2 Goldman Sachs Global Investment Research
Gerdau S.A. Steel
Goldman Sachs Global Investment Research 3