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| AHMSA |
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Sumant Vasal (52) 5325-2898
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April 24, 2000
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During 1Q00, Ahmsa’s total sales fell 6% due to a 5% decrease in total volume, and lower real steel prices resulting from the inflation/revaluation effect. However, gross profit and operating income improved 45% and 96% respectively, as a result of margin expansion derived mainly from the company’s cost control programs, better pricing, and higher value added products. As a result, operating results in 1Q00 continued to improve compared to the previous quarters with EBITDA rising 42%, and its margin reaching 26.7% compared to 17.6% last year. Due to the difficult financial situation, in late May 1999 the company declared itself in suspension of payments, a form of legal protection under Mexican law. Consequently, trading of the company’s stock was halted in Mexico and the US. In mid October, IMSA and GAN (the majority stakeholder of Ahmsa) agreed to form a strategic alliance between their subsidiaries IMSA Acero and Ahmsa. However, in late February 2000 negotiations terminated between both parties as Ahmsa announced that it is quite close to reaching an agreement with Aceralia- a Spanish steel maker. Ahmsa expects this strategic alliance to be complete in the coming months. From a financial standpoint, we believe this is a better deal for Ahmsa’s stakeholders, although we are not totally convinced that Aceralia is a better alternative than Imsa from a strategic point of view. We believe the company should continue to report good operating results throughout the year as a result of the low comparative base, and the considerable improvement in the steel market on a global level.
Net sales fell 6% compared to 1Q00 due to a 4.6% reduction total volume, amounting to 739.5 K in the quarter. In addition, real steel prices also fell slightly resulting from the inflation/revaluation effect (in dollar terms, we estimate prices rose in the low teens). Total steel volumes continued on the rise compared to the previous two quarters. Lower steam coal volumes also affected sales, although these should normalize going forward according to the company, although no details were available.
On the other hand, gross and operating income rose 45% and 96% respectively. We believe this was due to cost savings (originating from the new business plan for the period 1999-2003), and a better pricing environment. Overall, EBITDA increased 42%, and margins at all levels continued to improve compared to previous quarters. The company stated that EBITDA could have increased an additional 5% in the quarter if steam coal volumes would have been normal. It is important to note that Ahmsa reported bad operating results last year resulting from management’s poor decision making/strategies of over supplying the domestic steel market at very low prices.
Financing Activities
Ahmsa reported a net financial gain of Ps 459 million during the quarter, compared to Ps 1.1 billion last year. This was due mainly to non-cash FX losses compared to gains last year, and lower monetary gains. This was partially offset by a reduction in net interest expense as the company declared itself in suspension of payments in late May 1999.
As we mentioned in earlier reports, Ahmsa’s balance sheet is the worst in our steel sector sample. Leverage (total liabilities/equity) amounted to 328% at the end of the quarter, and on an adjusted basis (net debt/equity), it reached 224%. Although interest coverage amounted to 4.6x, we believe this is fictitious as not all interests are being considered due to the suspension of payments. We believe a more reasonable number is around 1.3x.
Outlook
During the past years, the company implemented several unsuccessful strategies to overcome its difficult financial position. This, coupled with a competitive steel market, led the company to default on certain debt and interest payments during April 1999, and consequently declare itself in suspension of payments. In mid October, IMSA and GAN (the majority stakeholder of Ahmsa) agreed to form a strategic alliance between their subsidiaries IMSA Acero and Ahmsa. This association was conditional upon the restructuring of Ahmsa’s debt, as well as putting an end to the suspension of payments. However, negotiations fell thru as Ahmsa announced in late February 2000 that it had a better offer from Aceralia- a Spanish steel maker. Aceralia would take on US$ 1 billion of Ahmsa’s debt out of the US$ 1.9 billion at the end of 4Q99, and it would capitalize the Mexican company with US$ 400 million. If the strategic alliance is approved, Aceralia would hold a controlling stake in the alliance (51%).
We believe 2000 should be a good year for the company due to the positive perspectives in the global steel market. Steel prices continue to rebound, which combined with the good economic growth expected in Mexico during 2000 should allow for improvement in operating results. The company estimates EBITDA of US$ 320 million for 2000, a 38% increase compared to 1999.
Sumant Vasal: savasal@cbbanorte.com.mx
The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.
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