Nippon Steel "USS could provide a path out of the value trap" (Buy) Goroh

Research evidence excerpt

Nippon Steel "USS could provide a path out of the value trap" (Buy) Goroh

America, higher raw material prices, and yen weakness. In FY3/28, earnings appear

From To % ch Cons.

likely to improve significantly on the dropping out of inventory valuation losses. We also 03/27E 96.8 46.5 -52 64.1

factor in an improvement in domestic metal spreads on the extinguishment of the time 03/28E 103.4 114.2 10 70.8

lag, and a profit growth trend at USS. We revise our EPS forecasts from ¥96.8 to ¥46.5 03/29E 111.3 108.0 -3 52.6

for FY3/27, from ¥103.4 to ¥114.2 for FY3/28, and from ¥113.3 to ¥108.0 for FY3/29.

In terms of shareholder returns, we assume a trend toward higher dividends in line with Harunobu Goroh

a payout ratio of around 30.0%. Analyst

harunobu.goroh@ubs.com

+81-3-5208 6215

Catalysts for breaking free from low valuations may be nearing

The company has been treated as a value trap as challenges have piled up, including a

prolonged stagnation in domestic steel demand, persistent concerns over pressure from

the supply of Chinese steel, and worries over a deterioration in the company's financial

position and capital efficiency due to large-scale acquisitions. However, with the

earnings contribution from USS becoming more visible, we focus on the possibility that

the company’s differentiating factors, led by the US, which has become a high-margin

market centered on high-value-added steel products, could trigger improvements in the

company's multiple. We believe potential catalysts for low valuation reassessment

include 1) an improvement in metal spreads as a result of steel price hikes for large-lot

customers (estimated at the end of August), and 2) confirmation of a steady

improvement in USS earnings in each quarterly results announcement, and, over the