GrafTech International Ltd.

EAF Details

GrafTech International Ltd. (NYSE: EAF) manufactures graphite electrode products essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals.

Result Performance for the Fiscal Year Ended 31 December 2021 – (FY21)

• Net sales reported at $1.3 billion in FY21, up 10% YoY, primarily due to better market conditions. The sales volumes stood at 167 thousand MT in FY21, up 24% YoY, covering long-term agreement (LTA) volumes of 110 thousand MT and non-LTA volumes of 57 thousand MT.
• Adjusted EBITDA grew to $670 million in FY21 from $659 million in FY20, mainly due to rise in volumes and pricing.
• The cash flow from operating activities reported at $443 million, free cash flow reported at $385 million and adjusted free cash flow stood at $456 million and 68% of adjusted EBITDA converted to adjusted free cash flow.

Source: Company Reports, Analysis by Kalkine Group

Key Updated

• On 7 April 2022, the company announced that it would hold its Q1FY22 earnings conference Call and Webcast on 6 May 2022 to discuss financial results and current business initiatives.

Q1FY22 Results Update

On 6 May 2022, the company has reported its Q1FY22 results where it posted net income of $124 million. Sales volume increased by 16% to 43 thousand metric tons, compared to Q1FY21. There has been an improvement in cash flow from operating activities to $146 million, reflecting a 20% increase on Q1FY21. The balance sheet also improved during the period with debt reduction of $70 million.

Outlook

Market trends improved in Q4FY21 for the company, which is anticipated to continue into 2022. The average non-LTA graphite electrode price grew 10% QoQ in Q4FY21. Hence, the company expects Q1FY22 average non-LTA prices to increase 17-20% over Q4FY21. However, the cost could be under pressure in 2022, led by global inflationary pressures, particularly for third-party needle coke, energy, and freight. The steel industry has reported unprecedented price volatility in the past 12 months. More broadly, the industry is regularly looking for ways to de-carbonize.

Guidance: Estimated LTA volume to stay between 95-105 thousand MT and Estimated LTA revenue between $910-$1,010 million in FY22.

Key Risks

The company’s operations are exposed to the legal, compliance, economic, social, and political risks related to its substantial operations in multiple countries. The business and its selling prices are cyclical, which could lead to lower profitability and net losses in the future. Fluctuation of foreign currency exchange rates and dependence on the supply of key raw materials also remains potential risks.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The stock has been valued using EV/Sales multiple based relative valuation (on an illustrative basis). The target price so arrived reflects the potential rise of low double-digit (in % terms). In addition, a slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering the expectation of an increase in cost, particularly for third-party needle coke, energy, and freight that could pressure its net income.

Considering the traction in volumes and improved outlook, we give a “Buy” recommendation on the stock at the current market price of $8.53 per share, as on 10:00 am New York Time, USA (GMT-4) as of 06 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

GrafTech International Ltd. (EAF) is a part of Kalkine’s Global Fully Charged Product

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.