GrafTech International Ltd

EAF Details

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

Q2FY21 Result Performance (For the Second Quarter Ended 30 June 2021)

• Driven by 39% YoY and 16% QoQ growth in sales volume to 43 thousand MT in Q2FY21, net sales of the company grew by 17.8% YoY to $330.75 million. Production volume rose 22% QoQ and 33% YoY to 44 thousand MT.
• Adjusted EBITDA grew by 6% YoY, to $160 million with adjusted EBITDA margin of 48%.
• Net income stood at $28 million, including one-time Change in Control charges (pre-tax) of $88 million due to the reduction in the ownership of its largest stockholder, Brookfield, to below 30% of its overall shares outstanding. However, adjusted net income stood at $114 million.
• It has cash and cash equivalents of $114 million and total debt of around $1.2 billion as of June 30, 2021.

Key Data (Source: Company Reports)

Recent Update

• Opened New Sales Office: The company, on 26 July 2021, opened a new sales office in Chiba-shi, Japan  to provide local commercial, customer service and technical support to its local customers. This office also aided in expanding its global sales and technical support personnel.

• Declared Cash Dividend: The board of directors of the company, on 4 August 2021,  declared a cash dividend of $0.01 per share for Q3FY21 to  be paid on 30 September 2021.

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 the selling prices of its products  are cyclical and that could lead to lower profitability and net losses in the future. Fluctuation in  foreign  exchange rates and dependence on the supplier to supply  key raw materials also remains potential risks.

Outlook:

The management of the company continues to witness improvement in the global steel market, which has enabled the company in posting robust sequential and year-over-year performance across key metrics in Q2FY21. The company is enthused by the industry’s sustained recovery for the rest of the year and the likely positive  impact on the business, going forward. In Q2FY21, the company  fast-tracked its production capabilities to cater to the rising customer demand due to the growth in the graphite electrode market. Meanwhile, the company expects further improvement in reported non-LTA pricing in H2FY21 as well as in 2022.

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

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation:

The stock has been applied using an EV/Sales multiple-based illustrative relative valuation method and the target price so arrived reflects a rise of low double-digit (in % terms). The company might trade at a slight discount to its peers’ average, considering reduced cash flow from operations in Q2FY21 as well as a significant decline in ROIC at 2.4% in Q2FY21 versus 7.1% in Q2FY20, and a longer cash conversion cycle at 127.1 days in Q2FY21 versus an industry median at 76.9 days. However, the company has witnessed increased sales volume in H1 FY 2021 on the YoY basis.

Thus, we give a “Buy” recommendation on the stock at the current market price of $10.21 per share, down by 2.58% on 20^th September 2021.

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