Description

Investment Thesis

Ryerson Holding Corporation (RYI) is a value-add processor and distributor of industrial metals.  The stock should appreciate significantly in price due to two main drivers.  First, the Company is a beneficiary of the US Tax Cuts and Jobs Act (TCJA), the effects of which are not yet reflected in sell-side models.  Second and more importantly, on May 15, 2019, the Company will be able to call and refinance the $650mm of 11.00% notes that it is carrying on its balance sheet.  The EPS and FCF/share accretion from tax reform and the refinancing, based on reasonable assumptions, is significant.  The Company has some foreign income so the analysis that follows oversimplifies things a bit but provides a good sense of the magnitude.  Right now, RYI pays ~$71.5mm in annual cash interest on the notes.  At the prior federal statutory tax rate of 35%, the after-tax EPS and cash flow impact of the interest on the notes is ~$46.5mm or $1.25/share on a base of 37.2mm shares.  Based on their current price of $113.15, the 11.00% notes are currently yielding ~4.6%.  Assuming the notes are refinanced at a 6.5% rate, not unreasonable given their current yield and the overall strength of the credit markets, RYI would pay ~$42.2mm in annual cash interest.  At the revised TCJA corporate tax rate of 21%, the after-tax EPS and cash flow impact of the interest on the notes is ~$33.4mm or $0.90/share.  This $0.35/share EPS and FCF/share differential is substantial in comparison to RYI’s current price of $12.60/share.  Competitor Reliance Steel & Aluminum (RS) is trading at 14.2x consensus 2018E EPS and competitor Worthington Industries, Inc. (WOR) is trading at 14.1x consensus 2019E EPS (May FY end).  Given its high leverage, RYI should trade at a discount to its peers.  However, even applying a discounted 10.0x PE multiple on the $0.35/share EPS impact of the TCJA and refinancing, RYI stock should price should appreciate by $3.50/share, or ~30% from current levels.

Company Description

RYI is a value-add processor and distributor of industrial metals.  The Company’s customer base ranges from local, independently owned fabricators and machine shops to large, international original equipment manufacturers.  The Company carries a full line of over 65,000 products in stainless steel, aluminum, carbon steel and alloy steels and a limited line of nickel and red metals in various shapes and forms.  More than 75% of the products RYI sells are processed to meet customer requirements.  Specifically, the Company provides a wide range of flat and long metals products and offers numerous value-added processing and fabrication services such as sawing, slitting, blanking, cutting to length, leveling, flame cutting, laser cutting, edge trimming, etc.  The Company operates 90 facilities across North America and five facilities in China.  The Company’s service centers are strategically located in close proximity to its customers, allowing RYI to quickly process and deliver its products and services, often within the next day of receiving an order.  The Company serves ~40,000 customers across a wide range of manufacturing end markets.  For the year ended 2016, no single customer accounted for more than 2% of RYI’s sales and the Company’s top 10 customers accounted for less than 12% of sales.  In 2016, RYI’s percentage of sales by metal consuming industry was: (i) Metal Fabrication and Machine Shops – 18%, (ii) Industrial Machinery and Equipment – 18%, (iii) Commercial Ground Transportation – 16%, (iv) Consumer Durable – 11%, (v) Construction Equipment – 9%, (vi) Food Processing and Agricultural Equipment – 9%, (vii) HVAC – 7%, (viii) Oil & Gas – 5%, and (ix) – Other – 7%.

Investment Merits

·        Relatively Stable Business vs. Other Cyclicals – While the profitability of metal service centers fluctuates with general economic conditions, service center profitability tends to be more stable than both upstream steel production and downstream OEMs and customers of service center products.  In large part but with some time delays, raw material price increases from metal producers are passed through the service centers to end customers, leaving service center margins relatively stable.  In addition, in the event of a significant economic downturn, service centers tend to be “naturally hedged” from a cash flow perspective; in challenging times they reduce their raw material buying and work down their inventory base, both of which have a positive affect on cash flow.

·      Low Capex Requirements – Capital expenditure requirements for metal service centers are minimal.  On a net basis, RYI’s capex was $15.3mm, $13.2mm and $18.0mm in 2014, 2015 and 2016 vs. vs. 2017E EBITDA of ~$170mm.

·      Financial Sponsor Ownership – Private equity firm Platinum Equity currently owns 56.4% of RYI and has been invested in the Company since 2007.  This financial sponsor has assisted RYI in improving is operations and maintaining discipline over capital allocation.  They have tremendous financial incentive to ensure RYI continues to perform and refinances their balance sheet, which will benefit the common stock.

Financials

Valuation

Based on the above model and assuming the Company refinances the 11.00% notes in May 2019 at a 6.5% interest rate, RYI should generate ~$2.20/share in 2020E EPS.  The model projects moderate assumptions for volume and pricing going forward.  Applying a 10.0x PE multiple on this EPS, based on where RYI’s comps trade, equates to a $22 stock.  Although it is unlikely the stock will reach that price level anytime soon, it appears reasonable that the stock could reach $17 by year end (~30% upside) as the prospects for refinancing the 11.00% notes become that much closer.

Catalyst

The main catalyst for the stock is the refinancing of the $650mm 11.00% notes the Company is carrying on its balance sheet.  The notes are callable on May 15, 2019.