thyssenkrupp: Undervalued Conglomerate With Long-Term Upside Potential (OTCMKTS:TKAMY)

Dear readers/followers,

Investing in one of the largest steel businesses on the planet should be a fairly simple choice – unfortunately, it isn’t. The company I’m reviewing here, ThyssenKrupp (OTCPK:TYEKF), is a company that continues to underperform. I had a “BUY” thesis/stance in my last article on the company, which you can find here.

It’s important for me to point out that my articles on this company didn’t elicit a whole lot of response when the company was actually cheap. That means that my position, small as it is, doesn’t suffer (in going into the negative, inclusive of dividends) much even from a 20% drop that we’re seeing here, because overall, I am still in the positive for my investment here.

What I am looking at is the company’s appeal for the 2024-2026E period – and we’re getting what I consider to be a higher degree of clarity here on a forward basis.

That is not to say that this is a given, or easy investment. I would say in fact, that ThyssenKrupp still has a lot of issues and uncertainty as well as valuational volatility that makes this company a tough sell. This is also especially true considering the BB rating in terms of credit.

However, I’ve made it clear and I want to make it clear here again, why I continue to take a strongly positive stance for the company in a forward context.

Let’s see what we have here.

ThyssenKrupp AG – The company’s longer-term upside remains

This is a company, that as it stands remains quite similar to other German higher-risk investments with volatility that I am writing about. However, the company differs somewhat from these as well, in the way that the sort of volatility we’re currently seeing in ThyssenKrupp is an inherent part of its business model, and if you go back 20 years, you can easily see that this company is one of continued ups and downs.

However, the positives are clear to see as well. There is very low debt to the business – under 10% long-term debt to capital, the company has a yield that it only cut during COVID, but that has been at €0.15/share for some time.

Estimating this company is still just as hard as it has always been, at least for the past aforementioned 20 years. ThyssenKrupp is the sort of commodity company that sees earnings drops as massive as 150-200%, only to be followed by bouncebacks in the same range – it’s volatile, simple as that.

A valuation approach to the company is also crucial given the devastating, double-digit returns you have suffered even long term as an investor in the company, while the market has soared.

so, understanding remains key here. understanding what the company is, and what I think it is likely to develop into.

On the positive side, aside from low debt, the company has continued liquidity of €7.9B and a net cash position of €3.8B with an equity ratio of 36.2%. The company is an enabler, profiteer, and assisting company in the decarbonization of the European and in some ways the global energy and electricity market.

It does this through billions in sales in Automotive, decarbonization tech, materials, Steel, and marine systems. All of these systems together have sales revenues of over €40B on an annual basis, and in many of these segments, the company is in fact market-leading or among the largest in the world.

You can see here that in many of these segments, there seem to be some issues in profitability, with below 1% in net profit margin or EBIT margin, even on an adjusted basis. That is what the company is trying to solve here. The current target is a positive EBIT effect of €2B by the fiscal year 24/25, and if it manages this, the company is clear to see a turnaround here.

How is the company expecting to manage this, exactly?

Well, ThyssenKrupp is focusing on the transformation of the Decarbon segment, increasing sales in by-products, renegotiation of the current leasehold contracts for assets, and sales into new segments – specifically aerospace, which is already ongoing.

This is what the company expects to be able to drive this increase not only in top-line revenue but also in bottom-line results.

The process here is ongoing, and for the latest quarter of 1Q, we have some clear progress in some of these transformative steps. We have an overall simplified group structure – and the sale of the last part of DT Polysius, or what was known as TK India, has been signed. There is also an ongoing discussion for spin-offs and solutions for the segments of Marine Solutions and the European steel division, which would turn the company into an automotive, decarbonization, and material services business with around €24-€26B in estimated sales.

Attractive? I would say so. And depending on the solutions for the Steel business, I am definitely interested in owning a stake here as well.

1Q was fully in line with management expectations and allowed ThyssenKrupp to confirm all of the outlook and guidance for the EBITDA and FCF for this year of 2024E. In fact, we’re seeing that the program here is stabilizing the 1Q earnings compared to previous years, and ThyssenKrupp has already signed two projects during COP28, with new partnerships on a global scale for the company.

Sales were technically down 9%, and EBITDA was, again technically, down 50% with FCF actually negative half a billion euros – however, all of these trends were more expected (except FCF; which had that at €450 in the negative prior to M&As), but these earnings still support the company’s forecasts for the full year.

This is the picture that is conveyed, from a company in the midst of this sort of transformative journey. It’s going to cost both money and time – but once done, I believe it will reward shareholders with both dividends and upside.

Some granularity to the segment results include softer spot market prices in both the steel segment and other segments, which are pushing things “down” – especially the European steel segment. But the FCF before m&A, with typical seasonality and specific macro considered, and if you account for net working capital build-up, is fully in line with guidance.

And in fact, as you can see, the stabilization here is “real”.

Market outlook and expectations are tricky in such a volatile environment and market. However, current market estimates, based on things like the S&P Global MVP Production Forecast, heavy vehicle forecasts, and Wood Mackenzie Wind power Market outlooks all speak of in part, robust trends – including things like increased consumption of steel sheets from the industry, global increase in Wind Power capacity in terms of newly connected demand, and solid trend in Hydrogen, with an exponential global hydrogen growth going well into 2050. The negative trends are LVP Europe MVP/HVP Europe and NA, but these are expected to be transitory.

Here is the company’s current outlook.

Viewing this, I believe we’re in a position to give a valuation target and an estimate for ThyssenKrupp going into the later parts of 2024.

We have a relatively clear potential upside, but I believe that the coming quarter won’t deliver any sort of massive clarity with regard to the evolution of the company’s long-term plans. It’s more of a standard quarter, with your typical sort of company volatility given the current macroeconomic climate and company specifics – by which I mean that the current state is in a transformative sort of period. To be clear, I don’t expect any massive changes for the coming quarter, and that’s why I’m comfortable publishing at this particular time – even close to a quarterly report.

I’d be happy to revisit the company or even edit the article if some things actually were to happen.

ThyssenKrupp for 2024 – perhaps the beginning of a longer-term turnaround.

In my last article, I made a case for a €12/share price for the company’s native German ticker. I justify this target on the basis of forward growth. Unlike some other companies that I cover in this situation, the reason that I am favorable for ThyssenKrupp is that this future growth is in fact in the near term. Current FactSet estimates for the company call for a triple-digit growth rate in adjusted EPS both for 2024 and 2025, and double digit for 2026, coming to an annualized growth rate for the next 3 years of almost 60%. Even if we were to value this at 15x, despite this monumental growth rate, that’s still €19/share.

So my PT of €12 holds within it a discount of ~35% for the 2026E period, or if you want to view it on the 2025E basis, it’s at the 15x P/E mark. I have at least a 3-year perspective on ThyssenKrupp here.

Risks and arguments against my thesis and my price target do exist, and they’re neither few nor insignificant. ThyssenKrupp has been a serial underperformed for well over a decade, with some key exceptions if you invested at the right price. Even the 3% yield doesn’t work as an argument here when the savings accounts we can easily get a yield of 4% or close to it.

However, ThyssenKrupp as a business is one of the key Steel producers on the planet – and even if the company were to split up its operations as the plan seems to be, the individual values of these businesses, and also the value of the business we’re seeing today, is higher than the market currently believes it to be.

To give you an idea, the company’s implied market cap at this time is below €3B on the basis of a sub-€5/share price. That’s with a company with sales of over €40B. Granted, the company has earnings issues, but this is not a company with revenue issues.

And I can see a turnaround incoming for those earnings.

Even if you forecast the company only at a long-term P/E of 15x, that’s a 77% annualized upside or almost 300% in 3 years. It may take and probably will take longer to realize that P/E, as I see it – but once this company proves that it can, in fact, achieve these things, which I believe it has been doing for the past year and more through its transformation, the upside here is absolutely non-trivial.

For that reason, I remain a shareholder in the company, and below €5/share, I not only call the company “cheap”, I’m also investing more.

However, as a last point, I will make it clear that this is a speculative business at this time.

Thesis

• ThyssenKrupp remains one of the more interesting global plays on steel, forging and the steel sector in Europe. While there are peers I’ve made money on that are not ThyssenKrupp, like Gerdau and Arcelor, I consider this one, despite its 50% RoR in the last year of 2022-2023 (now down to around 20-25%), to still have an upside. I added to it not that long ago, and I will continue to hold and build my position in the business.
• ThyssenKrupp is undervalued on the basis of NAV, Peers, and forecasts – because of that, my rating for 2024 for the company is a very clear “BUY”, albeit a clearly speculative one.
• 1Q24 saw the company hitting almost all its forecast targets. I now believe we have more clarity regarding the timing of the upside, so I am now more with conviction for this company as of May 2024.
• My PT for ThyssenKrupp is at €12/share native – and remains here for this article.

Remember, I’m all about:

• Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
• If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
• If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
• I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.

The only flaw with ThyssenKrupp, aside from its credit rating, is the lack of a dividend. But, I still consider it a “BUY” here – and it’s now “cheap” as well.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.