Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

A buy-side analyst with over 15 years of experience investing in Asian markets and specializing in the mid-small cap space, emphasizing value investing in companies with good free cash flows/dividends and long-term holding horizons. 
Exempt Financial Adviser (EFA) under CrossASEAN Research Pte Ltd. It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity, Bottom-up Analyst

Graftech, Solid Results + Bullish Guidance in Q3 2021

Graftech: Encouraging Q4 2021, Stronger Pricing into 2022

Graftech Q1 2022: Debt Deleveraging Continues, LTA Pricing Overhang An Issue

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

GrafTech International Ltd / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd (EAF US)</a> is a cheap pure play on graphite electrodes that find most of its usage in producing steel in the electric arc furnace (EAF). 
<ul>
<li>Trading at 7.3x FY21 and 5.6x FY22 PE, with a forecasted free cash flow of over 500 mn USD in 2022 in the very least,  the stock trades at an 18% free cash flow yield.</li>
<li>We believe that the company will use its free cash flow to deleverage as the current net debt on the balance sheet is 1.11 bn USD. With a run rate of 500 mn USD of free cash flow, we estimate the company will be debt-free by 2023.</li>
<li>We believe the company will return the free cash flow to shareholders as the company has no long-term growth plans. With a 50% payout ratio, we forecast a dividend yield of 8-9% in FY23. </li>
<li>The graphite electrode market has solid demand-supply dynamics, with China pledging to go greener and reduce its dependence on iron ore. One of MIIT's stated targets is to have 20% of steel output in China as EAF ( we estimate that as of now, that number is ~10% ).</li>
</ul>
Risks
<ul class="">
<li>Short-term difficulties in the expansion of EAF steel-producing capacity due to high electricity costs and limited scrap supply.</li>
<li>The company has contracts that are priced at 9,900 USD/ton to sell 100k tons of electrodes. The inability of customers to pay would put <a href="https://www.smartkarma.com/entities/graftech-international-ltd" target="_blank" data-smartkarma-citation="entities:27124:1" rel="noopener">GrafTech International Ltd's (EAF US)</a> cash flows at risk, and we see this as unlikely since steel prices are high globally.</li>
<li>Controlling shareholder Brookefield Asset Management is selling out. This, we believe, is an overhang on the stock price. </li>
</ul>
With clear guidance on long-term pricing, we can easily see the company making 730 mn USD of EBITDA in FY22. Based on a 6x EV-EBITDA multiple, we can derive a 16 USD share price representing 60% upside from here.

GrafTech International Ltd (EAF US) is a cheap pure play on graphite electrodes that find most of its usage in producing steel in the electric arc furnace (EAF). 

Trading at 7.3x FY21 and 5.6x FY22 PE, with a forecasted free cash flow of over 500 mn USD in 2022 in the very least,  the stock trades at an 18% free cash flow yield.
We believe that the company will use its free cash flow to deleverage as the current net debt on the balance sheet is 1.11 bn USD. With a run rate of 500 mn USD of free cash flow, we estimate the company will be debt-free by 2023.
We believe the company will return the free cash flow to shareholders as the company has no long-term growth plans. With a 50% payout ratio, we forecast a dividend yield of 8-9% in FY23. 
The graphite electrode market has solid demand-supply dynamics, with China pledging to go greener and reduce its dependence on iron ore. One of MIIT's stated targets is to have 20% of steel output in China as EAF ( we estimate that as of now, that number is ~10% ).

Risks

Short-term difficulties in the expansion of EAF steel-producing capacity due to high electricity costs and limited scrap supply.
The company has contracts that are priced at 9,900 USD/ton to sell 100k tons of electrodes. The inability of customers to pay would put GrafTech International Ltd's (EAF US) cash flows at risk, and we see this as unlikely since steel prices are high globally.
Controlling shareholder Brookefield Asset Management is selling out. This, we believe, is an overhang on the stock price. 

With clear guidance on long-term pricing, we can easily see the company making 730 mn USD of EBITDA in FY22. Based on a 6x EV-EBITDA multiple, we can derive a 16 USD share price representing 60% upside from here.

Graftech: Graphite Electrode Play With Debt Deleveraging