Bloomberg News

Goldman Recommending Usiminas on Rocca Cuts

November 26, 2012

Usinas Siderurgicas de Minas Gerais SA is beating major steelmaker stocks on speculation cost cuts will make it profitable after four quarters of losses. The rally will continue, say Goldman Sachs Group Inc. and Deutsche Bank AG analysts.

Usiminas, as the Belo Horizonte, Brazil-based company is known, returned 40 percent in the past three months including dividends, the most of any steel company with a market value of $5 billion or more.

Goldman Sachs’s Marcelo Aguiar, the most accurate forecaster for Usiminas in a Bloomberg Absolute Return ranking, this month joined a minority of analysts with a buy recommendation on the stock. Aguiar and Deutsche Bank AG’s Rodrigo Barros, the second-most accurate, expect cost-cutting efforts since Italian billionaire Paolo Rocca’s family joined the controlling group will result in a profit in 2013.

“There’s a revolution going on” at Usiminas, said Paolo Di Sora, a Sao Paulo-based fund manager at M. Safra & Co., which increased its stake in Usiminas almost sevenfold in the third quarter to 1.38 percent through its Everest Participacoes Ltda. unit. “It’s difficult to find another story like this in the stock exchange today.”

Surging returns for Usiminas, Brazil’s largest steelmaker after Gerdau SA (GGBR4), compare with a 5 percent loss in the past three months for Luxembourg-based ArcelorMittal, the world’s No. 1 producer.

Of 24 analysts covering Usiminas, five rate it a buy, six have a neutral recommendation and nine say sell, according to data compiled by Bloomberg. The remainder have it under review.

Best Performer

The best performer of 57 stocks in the MSCI Emerging Markets Metals & Mining Index (MXEF0MM) since June 30, Usiminas fell 0.4 percent to 11.75 reais in Sao Paulo today, reducing a year-to- date gain to 16 percent. Porto Alegre, Brazil-based Gerdau rose 27 percent this year and Sao Paulo-based Cia. Siderurgica Nacional SA, the country’s third-biggest steelmaker, dropped 32 percent. ArcelorMittal fell 18 percent in Amsterdam.

Usiminas is trading at 38 times earnings estimates for the next four quarters, more than triple the 11 ratio for the benchmark Bovespa index, data compiled by Bloomberg show.

Ternium SA and Tenaris SA, both controlled by the Rocca family’s Techint Group, last year agreed to pay about 5 billion reais ($2.4 billion) for a 27.7 percent voting stake in Usiminas, joining Tokyo-based Nippon Steel & Sumitomo Metal Corp. (5401) in the controlling group.

Goldman Sachs’ Aguiar estimates that Usiminas will post net income of 592 million reais in 2013, the best in three years, according to a Nov. 12 report. This year’s net loss will probably amount to 440.5 million reais, he said, which would be the biggest in at least two decades.

Improvements

Usiminas has boosted productivity, cut inventories and signed accords to reduce costs and improve operations, Chief Executive Officer Julian Eguren, who took office in January after running the Rocca family’s Ternium unit in Mexico, said on a Nov. 1 conference call.

“The measures to improve efficiency, cut costs and improve volumes will be a strong catalyst for Usiminas,” Deutsche Bank’s Barros said in an e-mailed response to questions. “Usiminas’s stock price already reflects the expected improvements for the next 12 months, but not that such improvements are a continuous process that may last for several years.”

Officials at Usiminas’s press office in Belo Horizonte declined to comment further or make executives available.

Stimulus

President Dilma Rousseff’s measures to stoke growth in the largest emerging economy after China helped Usiminas raise prices as much as 7 percent in July. Rousseff boosted tariffs to curb steel imports and cut taxes on carmakers, Usiminas’s main buyers, after slashing Brazil’s benchmark interest rate by 5.25 percentage points since last August to 7.25 percent.

Projects for the 2014 soccer World Cup and 2016 Olympic Games will help domestic demand rise as much as 6 percent next year, compared with growth of about 1 percent to 2 percent this year, Benjamin Baptista, ArcelorMittal’s Brazil head, said in an Oct. 30 interview in Santiago.

A potential recovery is already incorporated in Usiminas’s valuation and profit forecasts could be trimmed next year, HSBC Holdings Plc equity analyst Jonathan Brandt said.

“Most of the good news, if not all, is in the price,” he said in a Nov. 13 telephone interview from New York. “All of a sudden something happens and demand doesn’t materialize.”

Goldman Sachs’ Aguiar estimates that earnings before interest, taxes, depreciation and amortization will triple in 2013 to 2.31 billion reais. The average of 15 analysts’ estimates compiled by Bloomberg is for 2013 adjusted net income of 467.6 million reais on Ebitda of 1.96 billion reais.

“Industrial efficiency continues being our main focus,” Usiminas’s Eguren said. “The measures taken by the government will help improve the situation in the short-term, but the most effective changes will be those we do internally.”

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Adriana Arai at aarai1@bloomberg.net


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