Alleima (OTC: SAMHF) is a relatively new company as it was spun off from Sandvik (OTCPK:SDVKF) (OTCPK:SDVKY) in the second half of 2022. The separation of Alleima from Sandvik will enable the first to realize the company-specific strategic growth ambition and not just be a division of the larger Sandvik group.
Alleima is a manufacturer of advanced stainless steels, special alloys and heating systems. While the overall stainless steel market produces 50 million tons per year, the so-called “advanced” stainless steel sector is only 2-4 million tons per year, where Alleima is active.
The market for specialty alloys is separate from the high quality stainless steel market as this market also includes alloys such as titanium, zirconium and nickel. Alleima focuses on the niche market of industrial ovens. This means that Alleima focuses on the production of seamless pipes and stainless steel pipes, which is a very specific market segment (for example, heat exchangers, oil and gas umbilicals or even special steels for kitchen knives).
Alleima shares are listed on the Stockholm Stock Exchange under the ticker symbol ALLEI. There are currently just under 251 million shares outstanding, resulting in a current market capitalization of SEK 10 billion. At the current exchange rate of 10.7 SEK to 1 USD, the current market capitalization is approximately 935 million USD (I will use SEK as the base currency in this article). The average daily trading volume in Stockholm is about 1.2 million shares per day, giving a cash value of about $5 million.
While Alleima was able to raise prices, its profit margins remained low. In the third quarter, the company reported revenue of just under SEK 4.3 billion, and although it was up by about a third compared to the third quarter of last year, the cost of goods sold increased by more than 50%, which led to a decrease in overall profit.
Unfortunately, other expenses also increased, resulting in an operating loss of SEK 26 million. Taking into account significant non-recurring items (including spin-off costs associated with the de facto spin-off of Alleima from Sandvik), Underlying and Adjusted EBIT was SEK 195 million, according to Alleima. This is actually a good result compared to the third quarter of last year, which includes one-off items of SEK 172 million, meaning that EBIT in the third quarter of 2021 will be only SEK 123 million. This confirms the nearly 50% increase in EBIT in the third quarter of 2022 on an adjusted basis.
This also means that we should take the net loss of SEK 154m with a grain of salt as the potential result could be break even or close to it. This is normal, because there is a seasonal effect here: traditionally, the summer months in Alleim are the weakest, since it is summer in the northern hemisphere.
This also affects the evolution of working capital as Alleima traditionally builds inventory levels in the first half of the year and then monetizes those assets in the second half.
That’s why we can’t just extrapolate quarterly results, or even 9M 2022 results, to calculate performance for the full year.
That being said, the 9M 2022 Cash Flow Statement provides an interesting insight into how the company operates on a fundamental basis. The chart below shows the cash flow statement and you can see that the reported cash flow from operations was negative at SEK 419 million. You also see working capital accumulation of almost SEK 2.1 billion, which means that adjusted operating cash flow is around SEK 1.67 billion and just over SEK 1.6 billion after deducting rental payments.
The annual capital investment (maintenance + growth) is estimated at 600 million SEK, which means that the normalized capital investment for the first three quarters should be 450 million SEK, slightly more than the 348 million SEK actually spent by the company. Based on these results, normalized free cash flow for the first nine months of the year is around SEK 1.15 billion.
The fourth quarter could still be a little tricky as Alleima expects SEK 150m to have a negative impact on fourth quarter results due to exchange rates, inventory levels and metal prices. However, there is usually a fairly strong flow of orders and higher margins due to winter in the northern hemisphere. I think we may have to wait until 2023 (maybe even the end of 2023) to see how the company handles the current temporary headwind.
This does not mean that Alleima is in bad shape. Despite temporary headwinds, I expect Alleima to be profitable in the fourth quarter with a net income of SEK 1.1-1.2 billion, slightly higher in the current financial year. Net income of SEK 1.15 billion represents earnings per share of around SEK 4.6, suggesting that the shares are trading at around 8.5 times earnings.
One of the elements that I appreciate the most is Alleima’s very strong balance. Sandvik acted fairly in its decision to spin off Alleima, with a balance sheet of SEK 1.1 billion in cash and SEK 1.5 billion in current and long-term debt at the end of the third quarter. This means net debt is only around SEK 400 million, but Alleima also includes rental and pension liabilities in its presentation of the company. The total net debt is estimated at SEK 325 million, according to the company. I’m waiting for the full annual report to delve into the “official” net debt, and I’d also like to see how interest rate changes might affect the pension deficit.
In any case, Alleima’s net financial position (excluding pension liabilities) is likely to show a positive net cash position (although this remains subject to changes in working capital). Running the company debt-free will also confirm Alleima’s dividend policy of distributing 50% of ordinary profits. If my estimates for FY 2023 are correct, we expect a dividend payout of SEK 2.2–2.3 per share, resulting in a dividend yield of 5.5–6%. The standard tax rate on dividends for Swedish non-residents is 30%.
While it may take some time for Alleima to really show the market the free cash flow it can generate, the stock appears to be relatively attractive. Assuming a net cash position of SEK 500 million by the end of next year and a normalized and adjusted EBITDA of SEK 2.3 billion, the company is trading at an EBITDA that is less than 4 times its EBITDA. Free cash flow results could exceed SEK 1 billion by 2023, which should pave the way for attractive dividends and further strengthening of the balance sheet.
I don’t currently have a position at Alleima, but I think there are advantages to spinning off Sandvik as an independent company.
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Post time: Jan-09-2023