"We believe current price levels offer an attractive entry point and limited downside risk to investors," the analyst said in a note to clients. "Furthermore, we believe rising steel prices should translate into further near-term multiple expansion."
Mr. Zicha said steel prices may have bottomed given price increases in recent weeks, and believes further increases should be supported by industry shipments bouncing off the bottom and inventory restocking. He noted that inventory levels have declined to just 2.4 months of supply in the U.S and 2.6 months in Canada in June.
At current price levels, he sees little risk to the company's C$1 per share dividend, saying the company has solid free cash flow generation of C$1.49 in 2010 and available sources of financing, totaling about C$270-million in May. Russel also benefits from low capital investment, with maintenance capex at approximately C$20-million.
Raising his valuation multiple from 5.5x to 7.0x EV/EBITDA on his 2010 estimates, Mr. Zicha increased his 1-year price target on Russel shares from C$14.50 to C$18 and upgraded his recommendation from SECTOR PERFORM to SECTOR OUTPERFORM.
"We believe Russel's higher profitability, lower debt levels, and higher dividend yield, should support a higher multiple relative to its comps," he wrote.