Why 22 Percent Share Drop and Low Metal Prices Make Simec a Buy

  • Grupo Simec tumbles this year; down 13 percent in November
  • More than 60 percent of analysts recommend buying Simec

Metal prices are at a six-year low and Mexico’s steel industry is being battered by foreign competition. For two-thirds of analysts who follow Grupo Simec SA, it’s the perfect time to buy the steelmaker’s shares.

Guadalajara, Mexico-based Simec, which operates 19 steel production and processing plants in North America, has fallen 22 percent this year and 13 percent in November, the second-worst performer on the country’s benchmark IPC index last month. The company, which is 76 percent owned by Mexico’s Industrias CH SAB, lagged behind international steelmakers in November, which averaged a 0.9 percent return.

Analysts point to the company’s solid quarterly results and absence of debt amid slumping international metal prices and a depressed commodities market as reasons for optimism for Simec, North America’s largest producer of Special Bar Quality steels, according to Fernando Bolanos, an analyst at Monex Casa de Bolsa SA. Bolanos is one of the seven of the eight analysts that monitor Simec who recommend buying or holding the company’s shares, according to data compiled by Bloomberg.

Simec has been “one of the most outstanding companies within the sector” this year given the challenging market conditions, Bolanos said in a phone interview from Mexico City. “Despite the poor conditions of the sector, Simec has presented strong results each quarter” and is on track to see a 25 percent increase in earnings before interest, taxes, debt and amortization, or Ebitda, this year, he said.

International steel prices have fallen an average 32 percent this year as demand in China, the world’s largest consumer of the metal, has slumped. China’s steel demand is forecast to contract 5 percent in 2016 as oversupply and slowing demand will further weaken prices, Jiming Zou, Vice President and senior analyst at Moody’s Investor Service, said in a Nov. 24 statement.

No Debt

Simec’s strong margins this year, including a 57 percent increase in Ebitda in the third quarter, have been buoyed by the company’s lack of debt, which has allowed for expansion projects using its own financing, Bolanos said. The company has around $500 million in cash, Jose Luis Tinajero, the company’s head of investor relations, said in a phone interview in Mexico City.

Simec’s solid financial standing allowed for the company to announce a $600 million investment on Nov. 5 to construct a new steel and rolling technology plant for Special Bar Quality, or SBQ, production in Mexico’s central Tlaxcala state. The new plant, which is forecast to begin operation in the second half of 2017, will have the installed capacity to produce 600,000 annual tons of SBQ and will be financed in cash, according to a company statement.

“Around 40 percent of the production at the new plant can be used in the automotive sector,” which has seen a surge in investment in recent years, Juan Rich, Mexico City-based equity analyst at Interacciones Casa de Bolsa SA, said in a phone interview. “The growth expected in the automotive industry will likely benefit Simec once the plant begins operations.”

Steel Slump

The bullish forecast for Simec is not unanimous among the analysts that rate the stock, given that commodities and steel prices continue to slide amid decreased international demand and excessive supply in China. Javier Santiago, a BBVA equity analyst in Mexico City that recommends selling Simec and Industrias CH, “doesn’t see any catalyst that gives us any signal that things will improve” in the metals industry, he said in a phone interview.

“There has been a large amount of steel imported into Mexico from Asia, and as that trend isn’t reversed, we’re likely to continue to see similar prices,” according to Santiago, who forecasts the Simec stock to rise less than 10 pesos from its current price in 2016. “It is a very conservative company that has shown an inability to deliver returns.”

The eight analysts that rate the company’s shares forecast an average return of 30 percent for Simec during the next 12 months.

“The sales during the next few semesters are likely to be impacted by the market conditions, but we expect the Ebitda to continue to grow at a similar pace to this year,” said Rich at Interacciones. “It is a financially very solid, very healthy company, and we could see a recovery in the share price in the short term.”

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