Ferroglobe: Still Strong Despite Slowdown In Europe
Summary
- Third Best Adjusted EBITDA quarter ever and 5x higher than last year.
- Positive Cash Flow despite continued working capital build.
- Still insanely cheap on every metric.
Felbaba Volodymyr/iStock via Getty Images
The Quarter
Ferroglobe (NASDAQ:GSM) reported a solid operational quarter despite a marked slowdown from European customers, which was well-publicized and telegraphed as the third quarter progressed. Power costs are just too high for many European steel and aluminum producers. I had heard people concerned that adjusted EBITDA would be as low as $145 million and flat cash flow. The company came in with adjusted EBITDA of $185 million and generated over $40 million of free cash flow (OCF minus cap. ex.). The bulk of the decline from Q2's record numbers is about an even mix of volume (mainly Europe) and price (Europe and US).
GSM Q3 EBITDA Bridge (Q3 Company Presentation)
While this adjusted EBITDA number is down quite a bit from Q2's record $300 million, it still qualifies as the third largest quarter ever and is five times higher than Q3 last year and gets them to $729 million of EBITDA year to date.
Quarterly Sales and EBITDA breakdown (Q3 Company Presentation)
I think if there were to be a criticism of the quarter, it would be free cash flow generation. The company did $40 million of free cash. Persistent inventory builds are largely to blame -- $129 million this quarter. Management called out curtailed activity among European customers as the main reason. The company is also ramping up production at Polokwane. The CFO said she expected this to come down during the Q1-Q2 time frame. The company currently has $717 million of working capital versus $395mm in Q3 last year. Sales are higher and the company expects working capital to normalize at 21% of sales across the cycle. I'm not sure what across the cycle means exactly, but I think it's fair to say that at least $200 million could come out over the next few months. That might not sound like a lot, but it represents over $1/share, if released it would bring net debt to below zero.
Valuation
I think it's fair to say that while EBITDA estimates have to come down about 10%, the market has more than priced that in by taking down EV by over 20%. Any way you slice it, this stock is enormously cheap.
| Secured Debt | $3.5 million |
| Unsecured Debt (including a/r securitization & accrued int) | $336 million |
| Other financial liabilities | $90 million |
| Cash | $236 million |
| Net Debt | $194 million |
| Market Cap (188mm shares @ $5.10) | $959 billion |
| Enterprise Value | $1.153 billion |
| EV/2022 EBITDA (using $900 million) | 1.28x |
| FCF Yield through the Equity (assuming $700 million FCF) | 1.36x |
| P/E (USING ONLY THE FIRST 9 MONTHS OF 2022 EPS of $2.66) | 1.9X |
Conclusion
This company is in a cyclical industry. But as I've laid out in previous write ups, going back to $1/lbs Silicon Metal prices (from just under $3) would still mean around $400mm of EBITDA and over $300mm of free cash flow once the cost cuts laid out in February 2021 are realized. I just think that 3x that downside EBITDA and free cash flow scenario is worth more than just under $1 billion. I view today's dip as a gift.
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Disclosure: I/we have a beneficial long position in the shares of GSM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.