Zacks_Analysts' Blog : Gerdau Redeems All 8.875% Bonds - Analyst Blog

Brazilian steel producer, Gerdau S.A. (GGB) has elected to redeem all its 8.875% Guaranteed Perpetual Bonds, resulting in a payment of approximately US$600 million along with accrued and unpaid interest. The payment will be maid on September 22, 2010.

Following the redemption, the Bonds will be cancelled and de-listed from the Singapore Exchange Securities Trading Limited.

Gerdau S.A. is the second largest steel producer in the world and the largest in the Americas. The company recently released its financial results for the second quarter of 2010. Earnings per share soared 93% year over year to R$0.52 (US$0.29 per ADR) compared with R$0.27 (US$0.13 per ADR) in the year-ago quarter. The net income growth was driven by higher revenues and lower cost of sales and operating expenses as a percentage of revenues.

Considering the top line, net revenues of R$8,296.0 million (US$4,608.9 million) increased 30.0% year over year from R$6,401.0 million (3,062.7 million) in the year-ago quarter. The company’s results were above the Zacks Consensus Estimate of US$4,592.0 million. The revenue improvement was chiefly because of higher shipments in the quarter. Of the net revenues, Brazilian business accounted for 39.7% and registered a growth of 37% year over year.

Exiting the second quarter, Gerdau’s cash and cash equivalents were approximately R$1,875.3 million (US$1,041.8 million) compared with R$1,843.7 (US$1,013.0 million) in the previous quarter.  Long-term debt was R$12,794.7 million (US$7,108.2 million), up from R$12,653.7 million (US$6,952.6 million) in the previous quarter.

We believe Gerdau stands well positioned to leverage from the growing world steel market. It is anticipated that the Brazilian market would also remain strong in 2010 with constant/high demand from the manufacturing and construction industry.

Recently, Gerdau entered into a definitive agreement to acquire the remaining 33.7% stake in its North American unit, Gerdau Ameristeel Corporation (GNA). The combined business will help Gerdau extend its global presence by bringing additional business development opportunities. Further, Gerdau S.A.’s credit worthiness will enable Gerdau Ameristeel to procure low-cost funds.

However, the company’s high leverage together with its above average exposure to U.S. housing is a major concern. Gerdau faces tough competition from its peers such as Companhia Siderurgica Nacional (SID) and ArcelorMittal Brasil S.A. (privately held).

We currently maintain a Neutral recommendation on the stock.