Vallourec - The parts of the sum

All,

Please find our updated model on Vallourec here.

Vallourec’s timing on expanding their mining operations has given converted bondholders a significant boost to their investment, but it masks a continuously poor performance of the underlying core “tubes” business. We have attempted to estimate the revenue and Gross Profit contribution of the Brazilian mine, and this analysis further reinforces our negative view on the overall EV of Vallourec.

Bond Value:

At current and projected leverage multiples we don’t see any issues forthcoming that will prevent Vallourec of refinancing its bonds at the earliest call date, (June 2023), but in relation to the equity, we don’t view the current equity price as an attractive investment opportunity.

Sum of the parts:

Although the listed peer, Tenaris, trades at 14-15x LTM EBITDA, we don’t view it appropriate to value Vallourec on a similar multiple given the different geographical exposures and differing cashflow generation ability. But more importantly, Vallourec derives 70% of its EBITDA from its mining operations which would not be valued at such lofty multiples.

Vale trades at 3-4x and applying this multiple on our LTM EBITDA estimate of the mine, plus 14.5x the LTM EBITDA of the “tubes” business equates to only 3% upside to current share price.
Any recovery of the Oil & Gas market in South America and Europe will lag the North American market, and for this reason alone, Vallourec should trade at a discount to Tenaris’ EV multiples.

Cashflow:

Even including the significant boost from iron ore prices, positive free cashflow still eludes Vallourec, as management project €300m outflow in FY21. In fact, from their October 2020 projections (which was before the extraordinary rise in iron ore prices) the Company only projected modest FCF before 2025.

Iron Ore Prices:

Vallourec has benefited significantly from the rise in Iron Ore prices, and with the expansion in their mine, the timing couldn’t have been better. However, the iron ore price has retreated from its Q2 highs of over $200/t to current $160/t. This is still significantly higher than previous years, with Vallourec achieving c. $110/t in FY20.

Conclusion:

The bonds outstanding have sufficient asset coverage and despite the poor cashflow generation, we fully envisage the bonds being refinanced in June 2023. However, the equity appears over-valued for all the issues raised above and - not expecting another iron ore rally - we remain unwilling to invest.

Happy to discuss.

Tomas

E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk