Buy low with RHI Magnesita

RHI Magnesita is the world’s largest manufacturer of refractories. The products it makes include heat-resistant linings for furnaces and kilns, as well as a vast array of products to control the flow of molten metal, such as side-gates, nozzles and plugs. The company was formed in 2017 through the mega-merger of RHI and Magnesita Refratarios, which gave the group strong positions in Europe and South America, as well as bringing a raft of cross-selling and cost-saving opportunities.

While the enlarged group can lay claim to having made operational progress, the external trading environment has not been kind. In particular, the slowing global economy and trouble in the European automotive sector has made for a weak steel market, which is where RHI generates 70 per cent of sales. However, the company's steel business has managed to mitigate some of the weakness in Europe, which saw a 12 per cent first-half sales decline, with growth in Asia, which grew 9 per cent thanks to market share gains and the benefit of a shift towards higher quality steel, particularly in China and India. Overall first-half steel revenue fell 3 per cent and gross profits dropped 5 per cent. RHI's other markets were more encouraging. These include providing refractories for non-ferrous metal smelting and other high-temperature industrial processes, such as brick making. These operations grew half-year turnover by 12 per cent and also increased market share, despite some weakness in Europe and North America.

There are hopes that better times could lie ahead for steelmakers, with progress in US/China trade talks potentially providing a boost for industrial demand. But, regardless of this, RHI has plenty of potential for self help. This is in part down to the breadth of its operations. The company is involved throughout the refractory supply chain. It mines key refractory raw materials magnetite and dolomite, and is 50 per cent self-sufficient through its 10 mines. And as well as manufacturing products, the company handles logistics and distribution.

It also offers planning and commissioning services to customers, and is involved in disposal – and, increasingly, recycling. While this vertically integrated model can make the business more sensitive to changes in demand and raw material prices, it also gives the group more control over the cost base and more scope to find efficiencies. This has aided a cost-cutting drive since the merger, which is expected to take annual savings to €110m this year, up from €80m. In addition, a €15m boost is expected from addressing operational issues at four plants. And the company is benefiting from recently implemented price rises that customers have reportedly responded well to. 

Debt has also dropped markedly since the merger, from €936m to €611m as of mid-2019. This is equivalent to 1.1 times cash profit, which is inside the target range of 0.5 to 1.5 times. That said, net debt does need to be seen in light of a €337m pension deficit and other personnel provisions of €82m that chiefly relate to Austrian termination-benefit rules. There's also a further €150m of balance sheet provisions that mainly relate to problem contracts. 

Importantly, though, the company believes there is room for substantial further improvement. A new €40m cost-saving plan is under way. This will help the group towards a targeted annualised cash profit improvement of €70m-€80m by 2022. Other initiatives include pushing more higher-margin "solutions" sales and developing technology to monitor customer plant performance better. The cost of the new profit-improvement drive has been put at €220m over the next two years, but one-third of this is expected to be financed by reduced working capital. 

A healthier balance sheet is also helping the business expand through acquisitions. At the time of writing, RHI Magnesita is in discussions over an acquisition of Turkish mine Kumas Manyezit Sanayi, which mines magnesite ore products. The Competition and Markets Authority (CMA) has, however, opened an investigation into the deal.