Company Overview: GrafTech International Ltd. (NYSE: EAF) is engaged in the manufacturing of graphite electrode products essential for production of electric arc furnace steel and other ferrous and non-ferrous metals. EAF has vertically integrated the graphite electrode manufacturing with petroleum coke needle production, a primary raw material for graphite electrodes and a high demand product for lithium-ion battery manufacturing.

­­­­­­EAF Details

Material Business Updates

Figure 1: Valuable Business Updates

Source: Analysis by Kalkine Group

Historical Financial Trend:

EAF illustrated robust topline growth until FY20, when COVID-19 disruptions substantially struck the steel industry. The revenues have demonstrated substantial growth with a CAGR of 29.3% (FY16 – FY20). Gross margins have remained consistent while EBITDA margins improved substantially from FY17 levels.

Figure 2: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

Third Quarter FY21 Performance:

Figure 3: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 4: Annual Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~57.57% of the total shareholding. Brookfield Asset Management, Inc. and The Vanguard Group, Inc. holds a maximum stake in the company at ~­­­24.25% and ~8.51%, respectively.

Figure 5: Top 10 Shareholders

Source: Analysis by Kalkine Group

Analysis of Industry Parameters

Figure 6: Steel and Graphite Electrode Industry Analysis

Source: Company Filings, Chart Created by Kalkine Group

Key Metrics:

Consistent sales and production volume growth has translated into long-term sustainable growth levels. Despite short-term disruptions in FY20, EAF demonstrated substantial operational efficiency, warranted by steady growth in gross margins. The company managed a stable current ratio in FY20 over the prior year on liquidity.

Figure 7: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Industry Prospects: As per the World Steel Association, the long-term growth rate of Electric Arc Furnace is about 3%, with the merits of low cost structure and flexible operations.

ESG Factors are a Tailwind: As per Steel Manufacturers Association, Electric Arc Furnace produces approximately 75% or less CO₂ emissions relative to integrated steelmaking.

Figure 8: Guidance

Source: Analysis by Kalkine Group

Key Risks:

Graphite Pricing Impact: The potential overcapacity in global graphite electrodes, coupled with cyclical pricing of graphite electrodes, may adversely affect international pricing.

High Dependence: EAF is highly dependent on electric arc furnace steelmaking within the steel industry, which depends on the supply of petroleum needle coke and energy.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

EAF has delivered 3-month and 6-month returns of ~-4.204% and ~-2.459%, respectively. The stock is trading below the average of the 52-week low price of US$9.53 and the 52-week high price of US$14.16, indicating an accumulating opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering favourable steel industry prospects and improved sales volumes. For valuation, a few peers like Emerson Electric Co (NYSE: EMR), Hubbell Inc (NYSE: HUBB), Fuelcell Energy Inc. (NADAQ: FCEL), and others have been considered. Given the continuous uptick in electric arc furnace steelmaking, operational improvements, favourable FY21 guidance on LTA volume and LTA sales, the current trend in the industrial and metals & mining stocks, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the current market price of US$10.08 as of 24 January 2022, at 09:49 AM (GMT+5), New York, USA.

EAF Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.