We still prefer carbon steel vs stainless steel; ArcelorMittal (Overweight) and Acerinox (Equalweight)

Stainless steelWe continue to prefer carbon steel vs stainless

Morgan Stanley | The steel companies have historically done badly in recessions. Currently, with the risks of recession on the rise, margins at spot price continue to weaken and we have seen an important derating. It is likely that delays in prices support Q2 profits, but we see a significant slowdown from the next quarter. We still prefer carbon steel to stainless steel.

ArcelorMittal (OW): we expect the company to generate EBITDA of $5.1 bn, slightly below consensus estimates. It will be driven by good margins in Brazil and Europe, offsetting the production disruptions at the division ACIS. We estimate it will generate FCF of $1.4 bn and, therefore, maintain its current programmes for shareholder distribution, as well as announce a $1bn buyback. Looking ahead to the results’ conference, we are focusing on the commentaries regarding the dynamic of prices/costs in Q3, as well as expectations for the release of working capital during the rest of the year. Also on the update with respect to cash requirements ($8.4 bn: 4.5 bn in CAPEX, 2.2 bn in interests, 3 bn in taxes and 0.7 bn in other financial expenses).

Acerinox (EW): We expect a hike in profits with an EBITDA of €464 mn, a rise of 10% Q-on-Q (vs €442 mn consensus). This increase is driven by the improvement in the power of prices and the revaluation of the inventory. With regard to Net Debt, we estimate a reduction to €617 mn (vs €705 mn in Q1), thanks to the rise in profits. Ahead of the results’ conference, we expect the management team to: (1) update its expectations for EBITDA Q3’22 ((€348 mn MSe; €290 mn consensus); (2) comment on the development in energy costs and the impact of gas prices; (3) comment on the consolidation negotiations; (4) comment on its expectations with respect to shareholder distribution; and (5) comment on its outlook for demand in the different industries.

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