UBS upgrades Voestalpine to "buy" on EU quota cuts and earnings outlook

Investing.com -- Austria’s Voestalpine AG (VIE:VOES) received an upgrade to “buy” from “neutral” after UBS raised its price target to €43 a share, a 65% increase driven by projected gains from planned European Union quota reductions and stronger medium-term earnings across the company’s steel and railway businesses. 

In a note dated Monday, the brokerage said the Steel Division, which is largely exposed to the EU market, stands to benefit the most from the proposed 47% cut to flat steel import quotas. 

UBS said the reduction, if enacted, would lower imports by more than 10 million tons and lift EU utilization rates from the low 60% range into the mid-70% range, supporting higher regional steel prices.

UBS increased its EBITDA estimates for the next three fiscal years by 6%, 21% and 29%, citing both stronger second-quarter results and the likelihood that the quota cuts will proceed. 

The analysts said the steel unit’s earnings in the second quarter rose 9% quarter over quarter and 25% from a year earlier despite falling hot-rolled coil index prices over the summer. 

The performance contributed to a quarterly EBITDA total of €361 million, which exceeded UBS and consensus expectations by 8% and 7%. 

UBS said the company also generated €125 million in free cash flow, better than expectations, leading management to lift full-year FCF guidance to €350 million from €300 million.

The upgrade is anchored in UBS’ expectation that EU HRC steel prices could rise to €700-€750 per ton once the proposed cuts take effect, with the report noting that marginal domestic production would need to cover the full incremental cost of carbon emissions. 

UBS projected that this shift, combined with stronger medium-term contributions from the Railway Systems division, would support higher earnings. 

Railway Systems revenue is expected by management to grow at a 6% compound annual rate over five years, helped by global rail investment and supported by UBS’ estimate of about $198 billion in accessible project opportunities outside Germany. 

UBS said Germany’s planned €107 billion rail infrastructure program through 2029 is not reflected in management’s targets and could provide additional upside when initiated.

UBS said it raised Steel Division EBITDA forecasts by 25%, 53% and 72% for BY25/26, BY26/27 and BY27/28, citing the expected increase in utilization rates following the quota changes and higher spreads between steel and raw materials. 

It also increased Metal Engineering earnings projections by 9% and 11% for BY26/27 and BY27/28 after downgrading the near-term outlook due to the impact of U.S. Section 232 tariffs on seamless tubes. 

Higher carbon steel prices and moderating capital spending in later years led the bank to project free cash flow yields of about 10% in BY27/28 and BY28/29.

UBS maintained its valuation approach, using a 50/50 blend of discounted cash flow and a 4.5x EV/EBITDA target multiple, and rolled its model forward one quarter. 

The brokerage said the shares, which traded at €34.44 on Nov. 14, have already risen 90% in euro terms year to date, driven in part by anticipation of the EU safeguard measures. 

Even so, UBS said it believes the structural tailwinds from the quota cuts and Railway Systems growth remain under-reflected in consensus estimates and the current share price.