GrafTech International Limited

Company Overview: GrafTech International Limited (NYSE: EAF) manufactures graphite electrode products essential to producing electric arc furnace steel and other ferrous and non-ferrous metals. It has access to low-cost manufacturing facilities, including three high-capacity facilities.

­­­­­­EAF Details

Material Business Updates

Historical Financial Trend:

EAF illustrated robust topline growth until FY20 when COVID-19 disruptions substantially struck the steel industry. The revenues have demonstrated substantial growth with a CAGR of 25.0% (FY17 – FY21).

Full-Year FY20 Performance:

Top 10 Shareholders:

The top 10 shareholders together form ~56.55% of the total shareholding. Brookfield Asset Management, Inc. and The Vanguard Group, Inc. hold a maximum stake in the company at ~­­­24.49% and ~8.68%, respectively.

Key Metrics:

Consistent sales and production volume growth has translated into long-term sustainable growth levels. Despite short-term disruptions in FY20, EAF demonstrated substantial operational efficiency, warranted by steady growth in gross margins. The company managed a stable current ratio in FY20 over the prior year on liquidity.

Outlook:

Key Risks:

Graphite Pricing Impact: The potential overcapacity in global graphite electrodes, coupled with cyclical pricing of graphite electrodes, may adversely affect international pricing.

High Dependence: EAF is highly dependent on electric arc furnace steelmaking within the steel industry, which depends on the supply of petroleum needle coke and energy.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

EAF has delivered 3-month and 6-month returns of ~-11.11% and ~-14.8%, respectively. The stock is trading below the average of the 52-week low price of US$9.11 and the 52-week high price of US$14.16, indicating an accumulating opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering favourable steel industry prospects and improved sales volumes. For valuation, a few peers like Emerson Electric Co (NYSE: EMR), Hubbell Inc (NYSE: HUBB), Regal Rexnord Corp (NASDAQ: RRX), and others have been considered. Given the robust demand for electric arc furnace steelmaking, operational improvements, favourable guidance on LTA volume and LTA sales, potential upside as indicated by the valuation, and associated key business risks, we give a “Buy” recommendation on the stock at the closing market price of US$9.52, up by 0.95%, as of 26 April 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

EAF Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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