RHI Magnesita NV (LSE:RHIM, Financial)(RHHMY, Financial) offers refractory products (meaning resistant to decomposition by pressure or heat) for businesses that require facilities that can withstand temperatures above 1,200 degrees celsius. Steel, cement, glass and non-ferrous metals are examples of products that need refractory material to be manufactured.
Refractory materials are consumed in the process of making the products; it is an operating expense for the customers of RHI Magnesita. The rate of consumption varies for each purpose. For example, it has the shortest lifetime in steel production, from four hours to six months, whereas it has a minimum of a 10-year lifetime in glassmaking. The company also provides logistics, design, installation, monitoring, recycling and disposal services.
Construction, automotive and transportation, machinery and equipment, electronics and consumer goods as well as oil, gas and petrochemicals are the most important end markets for the refractory industry. The end market demand determines the level of production required.
Business segments
The Vienna, Austria-based company is organized in two segments: Steel and Industrial.
The Steel business supports customers in steelmaking and processing, while the Industrial unit serves customers that sell glass, cement/lime, non-ferrous metals, energy and chemicals.
The separation between steel and everything else is due to the size of steel-based revenue, which accounted for over 70% of total sales in 2022.
Risks
In its annual report for 2022, RHI Magnesita noted, "Our revenues are dependent on the production volumes of our customers rather than commodity prices, and that is why we can achieve consistently resilient margins compared to our customers who experience more margin volatility."
The Austrian government will gradually be increasing carbon taxes for companies operating there, so this poses a revenue risk for RHI Magnesita. This risk has an incredibly large potential penalty of over $959 million annualy.
To help combat this, the company has integrated carbon permit price projections into its financial planning and has a hedging program in place to fix future exposures. It is also developing new technologies, such as carbon capture and utilization/storage, to reduce emissions, investing $55 million in research and development. RHI Magnesita also aims to increase the use of secondary raw materials, which will reduce CO2 emissions compared to the mining or purchase of fresh raw materials.
RHI Magnesita is a business-to-business company that has no direct dependency on commodity prices. However, its volumes are closely tied to the volume of its customers because refractory materials are consumed at a rate with respect to end demand.
Further, around half of the raw materials used to make refractory products is obtained through internal sources, meaning there is still some dependency on other companies to obtain its product.
Financial review
In February, the company reported that revenue grew 30% to cover an increase in cost of production in 2022.
The Steel division's sales rose to $2.50 billion due to price increases across its product range. Despite a 4% contraction in global steel production (7% outside of China), steel volumes only decreased 1%, indicating market share gains. However, steel demand slowed as economies worldwide faced inflation, supply chain volatility, monetary tightening and China's slowdown. The Russia-Ukraine war also had a significant impact on energy markets globally, especially in Europe. The appreciation of the U.S. dollar on major global currencies added to the challenges, impacting U.S.-denominated debt in some economies.
The Industrial unit generated $1.03 billion in sales, which were up from the previous year. Cement and lime, which contribute 11%, saw an 18% growth in 2022 due to the recovery in pricing on the back of lower raw material costs. Non-ferrous metal sales also saw a significant increase of 51% from the prior-year quarter to reach $240 million. This was mainly due to significant price increases during the year and increased demand, particularly for copper and nickel. Revenue in the glass division also saw a substantial increase of 47% due to increased demand from China and the solar panel market. Industrial applications revenue increased 9% to reach $112 million.
By geographic region, revenue in Europe & Turkey increased by 24% to reach $866 million. However, volumes were lower than in 2021 as the company lost business from sanctioned customers in Russia. The steel market was also softer in the second half of the year, driven by high inflation and energy costs. Higher financing costs were the result of high inflation and interest rates across Europe, which in turn reduced end market demand, particularly in construction.
In North America, total revenue for the year amounted to $976 million, up 35% from 2021. The growth was a result of price increases implemented in the first half of the year. Prices stabilized in the second half of the year due to softer raw material costs and lower inbound freight costs from China to North America.
The 43% increase in revenue in South America was due to price increases, which enabled the Steel and Industrial divisions to pass on inflationary costs and surcharges to customers. The steel demand in several countries in this region decreased due to a high inflationary environment, leading to customer destocking, slowing construction and lower export demand.
The India region’s sales growth was significant at 31%. The steel market in the Asian country continued to grow in 2022, given higher levels of urban consumption and infrastructure spending, driving demand for capital goods, automobiles and materials for roads and metro projects. India’s demand outlook remains strong, led by an increase in steel consumption per capita and supported by the government’s goal to double steel production capacity by 2030. In West Asia and Africa, higher oil prices are expected to bolster demand for construction activities in the medium term as well as from large infrastructure projects in Egypt.
ESG
The risk for RHI Magnesita is that with carbon emissions being so high, it may have to pay a carbon tax. To mitigate this, the company is undertaking several processes.
One way it does this is by implementing circular business models and designing products that can be reused, repaired or recycled, thus reducing waste and increasing resource efficiency. Additionally, the company provides full transparency of the carbon footprint of its entire refractory portfolio through technical datasheets, a unique feature within the industry.
RHI Magnesita is also introducing new technologies, such as the K-binder technology for steel applications, which is not only a cost-competitive solution but also helps to reduce Scope 1 and 2 emissions by substituting the firing process with lower temperature tempering. As a vertically integrated company, it is able to implement sustainability initiatives across its entire supply chain since it has more control over each stage of the process.
By implementing these sustainable practices and innovative solutions, RHI Magnesita is working toward a more sustainable future for the refractory industry.
Valuation
The GF Value Line suggests the stock is significantly undervalued based on its historical ratios, past financial performance and analysts' future earnings projections.
The GF Score of 83 out of 100 indicates the company has good outperformance potential.
The Piotroski F-Score of 8 out of 9 suggests it is also a stock for value investors. One risk is the Altman Z-Score of 1.86, which means the company's financial position is not as strong as we would like.
Conclusion
Although it is undeniable that RHI Magnesita has risks and macroeconomic dependencies, there is reasonable management in place. It also has protocols to deal with increasing carbon taxes, ensuring the damage is minimized. Further, the dependency on the end market is favorable as the customer would absorb a large portion of any market volatility.
