Algoma Steel (ASTL) is a Heck of a Steal (Long DD) via /r/wallstreetbets #stocks #wallstreetbets #investing


Algoma Steel (ASTL) is a Heck of a Steal (Long DD)

TLDR: ASTL has $1.08B market cap, $810M cash on hand, and is making $280M EBITDA a quarter. Just did a $400M share buyback to reduce O/S by 28% and will continue buyback. Closed at $9.20 a share, I’m all over $10 calls for every month available.

The Basics:

Algoma Steel is a 120+ year old steel manufacturer in Canada. The stock (ASTL) trades on both the NASDAQ exchange as well as TSX in Canada.

On the back of a red hot steel market in 2021, the company went public via a reverse merger with a market cap of approx. $1.5B. At the time, the company had Net Debt (Debt minus Cash) of about $180M.

Fast-forward to Now:

Since going public, the company has had a series of blowout earnings reports. In their fiscal year 2022, which is 4/1/21 – 3/31/22, the company reported Revenues of about $3.0B, Net Income of about $1.1B, and Adjusted EBITDA of $1.17B (all amounts expressed in USD). They reported an additional Adjusted EBITDA of approx. $280M USD for the quarter-ended June 2022. Furthermore, as of 6/30/22, the company has Net Cash (Cash minus Debt) of about $810M USD – that represents an improvement of almost $1.0B in the company’s Net Cash position from when they went public at a $1.5B valuation.

Yet somehow, the company is currently valued at a paltry $1.0B USD despite the massively improved Balance Sheet and the continued blowout earnings reports.

Major Share Buyback Completed (28% of O/S):

Last month (July), the company completed a buyback of approx. 28% of the outstanding shares, reducing the share count from about 147M to 105M. The buyback price was at $9.75 a share or about $1.4B valuation. This buyback was key, because there were existing creditor shareholders (that had ownership from the bankruptcy protection restructuring) that held about 45M shares as of 3/31/22 and those investors had previously signaled their intention to exit their position. The buyback completed by the company in July 2022 was for a total of 41M shares, and that should have cleared out a majority of the legacy investors who wanted to take their profits and exit.

What that means is there is no longer a massive backlog of shares available to be sold by those wishing to exit. Or in other words, the stock is ready for take-off!

Algoma Steel has Several Advantages Over Peers:

Despite a recently slowing steel market (HRC prices have declined more than 50% from their highs), this company still stands to make a killing over the next few quarters and beyond. They have several significant competitive advantages which I have highlighted below:

  1. Green Transformation: The company is currently in the midst of a green transformation to Electric Arc Furnace (EAF) steelmaking. This will reduce the company’s emissions by over 70%, offer cost savings, and also increase production capacity. What makes this even more attractive is the fact that they have significant support from the Canadian government, who has provided debt at very favorable terms (in some case forgivable!) that will cover about $325M USD out of the total $500M USD transformation cost. Justin Trudeau literally went to the company’s headquarters and made this announcement himself, so when I say they have support of the Canadian government I am not exaggerating

  2. Favorable Pricing on Plate Products: The company has a sizable portion of their revenue coming from plate products (ARP), which are still near all time high prices despite the recent decline in hot rolled coil products (HRC)

  3. Favorable Forward Pricing due to Contract Realization Lag: The company contracts out over 60% of their revenue, and that contract pricing is often realized on a quarter lag. What that means is despite recent pullbacks in pricing, the company won’t feel those impacts until a quarter later than their peers which means they have a longer runway of blowout earnings than peers

  4. Favorable Cost Structure: In terms of costs, the company has long-term contracts in place that significantly reduces its exposure to commodity price risk for its key inputs. The company recently stated that the only commodity they have some significant sensitivity to is iron ore, and for those who are not aware iron ore prices have dropped dramatically over the last few months

Despite all these advantages, Algoma Steel is being treated like the little brother of the steel industry; it’s priced at a multiple that is significantly below peers.

The Bottom Line:

Even after factoring in the $400M USD buyback in July 2022, the company has Net Cash of approx. $410M which is over 40% of the company’s market cap. Said differently, if you were to deduct cash on hand from the market cap, it implies an Enterprise Value of only about $600M (keep in mind the company earned $280M in Adj EBITDA in the past quarter alone!). The company has long-term support of the Canadian government and will be a key part of reducing emissions in Ontario. Beyond that, they are a historic company and a mainstay in the Canadian and North American steel markets.

Although the company did not provide guidance for the upcoming quarter, they are set up to enjoy another quarter of significant profits that are well above historical performance levels. Even if pricing returns to historical averages, these guys are phenomenal operators and I am confident they will continue to be profitable.

What makes this particularly interesting is that within another quarter or two, the company will again have so much cash on hand that they have nothing to do with it besides return it to investors (they arguably do even right now). That likely means either another major share repurchase or a hefty special dividend.

Submitted August 05, 2022 at 02:35PM by GreenStreetEF
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