Befesa: Sees High Single-Point EBITDA Growth In 2023 (OTCMKTS:BFSAF)

Introduction

Since it’s been almost four months since I published my first thesis on Befesa (OTCPK:BFSAF) I wanted to update my thesis as I was about to pull the trigger on the long term. . I have written it Put an option on this company that specializes in iron dust recycling but I may have to buy the stock sooner rather than later.

As mentioned in the previous article: Befesa Germany has its main listing in Germany on the Deutsche Boerse, but the company is based in Luxembourg, because these payments are subject to the standard 15% of Luxembourg’s withholding tax. There are 40M shares outstanding, resulting in a current market capitalization of approximately 1.6B EUR. The company’s most liquid listing is in Germany where it trades with the BFSA as a trademark. The more than 70,000 shares per day. I refer to the German list of Befesa, and the base currency used throughout this article is the Euro.

2023 will be a good year as the new plants will be operational

This article is meant to be an update to the general article published in January. For all the relevant information, background information and detailed plans for Befesa’s planning to increase its EBITDA by 2027, I would like to refer you to that January article.

Before discussing the prospects for 2023, let’s look at Befesa’s performance in 2022, and especially in the last quarter of that year. And that last quarter was less clear than I would have liked as the company reported full year EBITDA of 215M EUR, indicating that Q4’s adjusted EBITDA was around 51M EUR. Not bad, but I expect Q4 EBITDA to be 10% higher as I am looking at full year EBITDA of over 220M EUR.

The weaker-than-expected Q4 results have led to weaker stock prices in recent months as the stock trades about 10% lower than last year. the previous article was published and lost 30% of its value from the end of January. .

I think the results in 2022 are a little bit too good. As you can see below, the financial results are very solid. Total revenue increased to approximately 1.14B EUR and Befesa generated an operating profit of approximately 165M EUR.

We also see that net financing costs are increasing because Befesa’s debt has a floating interest rate but due to strong operating performance, it generated a pre-tax income of 130.3M EUR (more than 15% to 2021) , but net income increased by only 4% due to a higher tax bill in 2022 (and a lower tax bill in 2021). The net income attributable to Befesa shareholders was 106.2M EUR resulting in an EPS of 2.66 EUR per share. Note that the share count increased in 2022 when the company completed its capital raising in 2021 and the share count increased in 2022.

My first investment article is based on Befesa’s ability to generate free cash flow that is helping to specifically fund its expansion plans. Despite the lower EBITDA result than expected in Q4 2022, Befesa looks good.

The company reported a total operating income of 137.3M EUR but this included investing 2M EUR in the working capital base and canceling 10-12M EUR in lease liabilities, so i on a change, I think it’s fair to work with someone below. operating cash flow of approximately 127M EUR.

The total amount is 107M EUR (2.5M EUR spent on intangible assets and 104.2M EUR spent on tangible assets) excluding M&A, but as below (taken from corporate presentation ) clearly shows that the total expenditure is only 40M EUR. the 40M EUR investment in the maintenance fund includes investments in the efficiency and reconstruction of the Hanover plant that burned down recently. Although the plant is still being built, I want to argue that this should not be considered a “pure” conservation fund.

Just to err on the side of caution, I use 50M EUR in cash flow, and 127M EUR in operating cash flow, resulting in a free cash flow of 77M EUR. It is 1.93 EUR per share and may not be very exciting, but Befesa is a growth story. The company plans to pay 1.25 EUR per share, which means about 27M EUR will be retained and used to finance the company’s expansion plans.

Although I initially hoped that Befesa would be able to finance these expansion plans, the company had to raise its game because the FY 2022 net free cash flow after covering the dividend was not enough to cover 50- 75M EUR in annual growth investments.

Fortunately there is some form of snowfall. When new projects are completed they will start to contribute to EBITDA and the bottom line and free cash flow (before and after interest payments) should increase over the next few years. Befesa has also said that it expects to pay off its financing project until 2027 as we will see the first breeding projects begin to contribute this year. The Henan plant in China was completed in December 2022 while the Hanover plant is also currently on the rise, and these two areas will have a positive impact on this year’s EBITDA.

The company hasn’t yet released official guidance for 2023 (it’s waiting for zinc treatment costs to be determined, which could weigh on profits), but the company said it sees a “solid floor” in 2022 profits. This will probably confirm the 215M EUR EBITDA bottom line, and Befesa will also confirm that it expects a positive profit of 10-15M EUR from its zinc hedge book as the company will protect part of its operations. to higher prices.

Investment account

Although Befesa’s recent results have not been surprising, investors should keep in mind that this company is a major player in the steel dust recycling sector and has strong growth plans. The only uncertainty is interest rate risk, but the company has hedged half of its floating rate risk, meaning that even if the interest rate is higher, the increase should be gradual until the loan matures at year 2026.

I’m looking forward to seeing Befesa’s official guidance for 2023, but I expect a high single digit EBITDA increase to 230M EUR resulting in a net income of around 100M EUR and profit free for 105-110M EUR. I have written put options on Befesa which are currently out of the money but may establish a long position in the common shares in the future.

Editor’s Note: This article refers to one or more stocks that do not trade on the US stock exchange. Be aware of the problems associated with these trees.