🕐18.04.12 - 08:54 Uhr

INVESTEC: RUUKKI GROUP PLC: FINAL PIECE OF THE EUROPEAN PUZZLE (HOLD)




CLICK HERE FOR FULL REPORT AND DISCLOSURES 18 April 2012
Ruukki Group Plc (RKKI.L) Closing Price: 72p Rating: Under Review
RKKI has announced that it intends to complete consolidation of its entire European business by acquiring the EWW chrome processing facilities in Germany and by terminating the profit and loss sharing arrangement with the RCS trading business in Malta.

The total transaction value of a minimum €25.3m, payable to major RKKI shareholder, Kermas Ltd, will consume a fair proportion of RKKIs cash (€66m as end of 2011), but will provide it with complete ownership and control of the European businesses.
· This transaction between RKKI and Kermas ends the remaining arrangements entered into in October 2008, when RKKI acquired the European business from Kermas.

The key features of the transaction are as follows.

o EWW cash.

RKKI is to acquire 100% of EWW for €17.3m cash (potentially adjustable up to €20m).

EWW toll treats the chromite concentrate generated from RKKIs Turkish mining operations (TWS) and produces speciality alloys used in the automotive, aerospace and power generation industries. o RCS cash.

The profit and loss sharing arrangement between RKKI and the RCS trading business, in relation to the marketing of these speciality alloy products and the Turkish chrome ore not sold to EWW, is to be terminated for €8m in cash.

This equates to the amount estimated to be payable in future profits from 2011 to 2013. o Other.

The 70.2m options granted to Kermas, relating to the P&L sharing arrangement, are to be cancelled, as are various lock up arrangements and management arrangements. · In effect, Kermas is to receive €25.3m cash, while relinquishing profit sharing arrangements and options.

Given that Kermas is a 28.5% shareholder in RKKI, this constitutes a related party transaction and will therefore require shareholder approval the Annual General Meeting on the 10 May 2012. · The RKKI board values the 100% control that this transaction will provide and regards the transaction as the optimal use of available funds, and consistent with RKKIs stated vision of being a major player in the chrome industry within five years.

In the absence of further detail, we have to assume that the transaction is attractively accretive.

More details on the transaction are to be distributed in a circular. · EWW is consolidated within RKKIs accounts, but RKKI reports that in FY11A it generated a profit after tax of €0.35m, while the carrying value of its assets was €22.6m.

RKKI is paying a minimum €17.3m for EWW. · We note from the RKKI accounts that the European businesses as a whole generated EBITDA of €13.8m and €7.8m in FY11A and FY10A respectively.

However, given the opaque nature in which RKKI reports its operating costs, it is difficult to establish what these numbers would have been had todays announced transaction already taken place.

Hence, in the absence of further information, it is not possible to ascertain exactly how accretive this transaction is. · If we were to assume that the historical EBITDA figures would have been improved by a nominal 25%, then the transaction would equate to RKKI paying around 8-10x average annual EBITDA.

However, we do also note that the FY10/FY11 EBITDA figures represent earnings in a depressed pricing environment and that the transaction could be substantially more accretive in an improved market. · Valuation and target price.

Our target price for RKKI is based on our risked NPV of 96p, which does not include any value for RKKIs longer term expansion plans and new projects.

Given that we need to determine how todays proposed transaction impacts our forward earnings and valuation, we are putting our target price and recommendation under review. · Outlook.

RKKI remains well positioned to benefit from a turnaround in the FeCr market, which is in turn aligned with global stainless steel production growth.

In the meantime, we believe that it has the balance sheet to withstand a prolonged downturn and potentially even to acquire additional assets, expanding its mineral resource base in particular.
Hunter Hillcoat +44 (0) 20 7597 5182
Louise Collinge +44 (0) 20 7597 5779
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