Latin America Equity Research 24 May 2013
GGBR4.SA, GGBR4 BZ Downgrade to: Neutral Previous: Overweight Price: R$13.67 Gerdau Price Target: R$16.50 Earnings recovery to be slower than expected; GOAU4.SA, GOAU4 BZ Overweight Downgrading to Neutral Price: R$17.34 Price Target: R$26.00
We are downgrading Gerdau to N from OW as the earnings recovery story has been LatAm Basic Materials slower to evolve than we initially expected driven by weaker than expected demand in Rodolfo Angele, CFA AC NA and weaker than previously expected margins in Brazil and Specialty divisions. (55-11) 4950-3888 While we believe the earnings have bottomed in 1Q13 and should stage a recovery [email protected] beginning 2Q13, we see limited upside to our estimates given present business Banco J.P. Morgan S.A. conditions, which remain challenging from a margin and demand front, and thus we find the stock expensive at current valuations (trading at 8.9x and 7.5x 2013E and Mandeep Singh Manihani, CFA 2014E EBITDA vs. 7.6x and 6.6x for peers). That said, we see Gerdau as our (1-212) 622-6433 [email protected] preferred steel exposure, especially relative to Brazilian flat steel producers. We retain our OW rating on Metalurgica Gerdau and see it as a discounted way to gain exposure J.P. Morgan Securities LLC to Gerdau. Lucas Ferreira (55-11) 4950-3629 Earnings recovery to be slower than expected, trimming estimates further. [email protected]
While we expect Gerdau’s earnings to improve from 2Q13 onwards, we believe the Banco J.P. Morgan S.A. pace of recovery is likely to be slower than we had expected as business conditions remain challenging. US non-residential construction recovery has been weaker than Table 1: LatAm Steel Comps expected, and price weakness in long steel prices globally should mean there is limited room for price increases in Gerdau’s end markets. In addition, the company EV/EBITDA P/E Company 13E 14E 13E 14E should continue to see costs related to ramp-up in India operations, impacting CSN 5.6 5.6 10.0 10.8 recovery of margins for the specialty division. As such, we are trimming our NA Gerdau 8.9 7.5 19.4 14.5 EBITDA estimates on slightly weaker volumes and tighter metal spreads (and thus Usiminas 8.8 7.0 38.3 21.6 Ternium 5.5 4.8 10.8 8.6 weaker margins). We are also being more conservative in our estimates for earnings LatAm 7.6 6.6 19.4 14.0 recovery for Brazil and specialty divisions, but we expect sequential recovery until Source: J.P. Morgan estimates. 3Q after dismal a 1Q13. Overall, our revised 2013/14 EBITDA estimates are R$4.2B/R$5.0B, -7%/-6% vs. prior estimates and -11%/-12% vs. Bloomberg Table 2: Changes in Estimates consensus. R$B (except EPS in R$) New estimates New vs. Old Still the best placed company within the Brazilian steel sector. Within the 13E 14E 13E 14E challenging steel sector, Gerdau has a relatively better top-down (exposed to Brazil’s Revenues 39.4 41.9 0% 3% growing construction demand and recovery of US non-residential construction EBITDA 4.2 5.0 -7% -6% EBITDA % 11% 12% -1% -1% segment) and bottom-up story (improving product mix and rising iron ore exposure). EPS 0.70 0.99 -25% -14% In addition, lack of other compelling investment alternatives in the Brazilian steel Source: J.P. Morgan estimates. sector (we rate both CSN and Usiminas as UW), should mean that Gerdau will be viewed as the relative “safe haven” for exposure in the steel sector in Brazil. Valuations not supportive of an OW, downgrade to N. We see limited upside to our estimates given present business conditions, which remain challenging from a
margin and demand front, and thus we find the stock expensive at current valuations Please visit our research on Bloomberg at (trading at 8.9x and 7.5x 2013E and 2014E EBITDA vs. 7.6x and 6.6x for peers). JPMA ANGELE
See page 9 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
www.jpmorganmarkets.com Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Equity Ratings and Price Targets Mkt Cap Rating Price Target Company Symbol (R$ mn) Price (R$) Cur Prev Cur Prev Gerdau S.A. GGBR4.SA 23,245.96 13.67 N OW 16.50 18.50 Metalurgica Gerdau GOAU4.SA 7,047.39 17.34 OW n/c 26.00 31.50 Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 23 May 13.
Neutral Gerdau S.A. (GGBR4.SA;GGBR4 BZ) Company Data FYE Dec 2012A 2013E 2013E 2014E 2014E Price (R$) 13.67 (Prev) (Curr) (Prev) (Curr) Date Of Price 23 May 13 EPS - Recurring (R$) 52-week Range (R$) 21.67 - 13.25 FY 0.84 0.93 0.70 1.15 0.99 Mkt Cap (R$ mn) 23,245.96 Revenues FY (R$ mn) 37,982 39,414 39,412 40,780 41,941 Fiscal Year End Dec EBITDA FY (R$ mn) 4,176 4,536 4,201 5,338 5,038 Shares O/S (mn) 1,701 Bloomberg EBITDA FY (R$ 4,507 - 5,206 - 6,305 Price Target (R$) 16.50 mn) Price Target End Date 31 Dec 13 P/E (USD) FY 15.5 14.2 19.3 11.7 14.4 Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
Overweight Metalúrgica Gerdau S.A. (GOAU4.SA;GOAU4 BZ) Company Data FYE Dec 2008A 2009A 2010A 2011A 2012A Price (R$) 17.34 EPS - Recurring (R$) Date Of Price 23 May 13 FY 3.06 1.20 2.10 1.87 1.12 52-week Range (R$) 27.02 - 16.88 Source: Company data, Bloomberg, J.P. Morgan estimates. Mkt Cap (R$ mn) 7,047.39 Fiscal Year End Dec Shares O/S (mn) 406 Price Target (R$) 26.00 Price Target End Date 31 Dec 13
2 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Gerdau: Downgrade to Neutral
We summarize our revised estimates for Gerdau in Table 3 below.
Table 3: Gerdau: Summary of changes in estimates R$M New Estimates % change (YoY) Old Estimates % change (New/Old) 2012A 2013E 2014E 2015E 13E/12A 14E/13E 15E/14E 2013E 2014E 2015E 2013E 2014E 2015E Revenues 37,982 39,412 41,941 46,640 4% 6% 11% 39,414 40,780 46,217 0% 3% 1% EBITDA 4,176 4,201 5,038 5,926 1% 20% 18% 4,536 5,338 6,571 -7% -6% -10% EBITDA Margin 11% 11% 12% 13% 0% 1% 1% 12% 13% 14% -1% -1% -2% Net Income 1,426 1,193 1,687 2,321 -16% 41% 38% 1,588 1,962 2,830 -25% -14% -18% EPS 0.84 0.70 0.99 1.36 -16% 41% 38% 0.93 1.15 1.66 -25% -14% -18%
Volumes (kt) 18,594 19,104 19,928 21,552 3% 4% 8% 19,169 19,998 21,627 0% 0% 0% Brazil 7,299 7,556 7,810 8,378 4% 3% 7% 7,554 7,807 8,375 0% 0% 0% Domestic 5,320 5,911 6,427 7,235 11% 9% 13% 5,905 6,420 7,228 0% 0% 0% Exports 1,979 1,645 1,383 1,143 -17% -16% -17% 1,649 1,387 1,148 0% 0% 0% North America 6,472 6,308 6,629 6,984 -3% 5% 5% 6,375 6,702 7,062 -1% -1% -1% Latin America 2,708 2,721 2,927 3,456 0% 8% 18% 2,721 2,927 3,456 0% 0% 0% Specialty 2,657 2,934 2,991 3,194 10% 2% 7% 2,934 2,991 3,194 0% 0% 0% Eliminations (542) (415) (429) (460) -23% 3% 7% (415) (429) (460) 0% 0% 0%
EBITDA (R$M) 4,176 4,201 5,038 5,926 1% 20% 18% 4,536 5,338 6,571 -7% -6% -10% Brazil 2,394 2,548 3,005 3,563 6% 18% 19% 2,704 3,155 4,066 -6% -5% -12% North America 922 671 802 964 -27% 20% 20% 780 899 1,080 -14% -11% -11% Latin America 180 255 343 427 42% 35% 25% 258 365 460 -1% -6% -7% Specialty 1,073 922 1,152 1,283 -14% 25% 11% 983 1,179 1,286 -6% -2% 0% Eliminations (393) (195) (264) (311) -50% 35% 18% (189) (260) (320) 3% 1% -3%
EBITDA Margin (%) 11% 11% 12% 13% 0% 1% 1% 12% 13% 14% -1% -1% -2% Brazil 17% 17% 18% 19% 0% 1% 1% 18% 20% 22% -1% -1% -2% North America 7% 6% 6% 7% -2% 1% 1% 6% 7% 8% -1% -1% -1% Latin America 4% 5% 7% 7% 2% 1% 0% 5% 7% 8% 0% -1% -1% Specialty 15% 11% 14% 14% -3% 2% 0% 12% 15% 14% -1% -1% 0%
Prices (US$/ton) 1,046 1,016 983 977 -3% -3% -1% 1,034 1,005 1,002 -2% -2% -3% Brazil 989 978 977 986 -1% 0% 1% 1,006 1,018 1,038 -3% -4% -5% North America 985 947 895 888 -4% -6% -1% 958 905 899 -1% -1% -1% Latin America 938 869 824 810 -7% -5% -2% 873 832 818 0% -1% -1% Specialty 1,423 1,365 1,315 1,299 -4% -4% -1% 1,381 1,331 1,308 -1% -1% -1%
Prices (R$/ton) 2,043 2,063 2,105 2,164 1% 2% 3% 2,056 2,039 2,137 0% 3% 1% Brazil 1,932 1,985 2,093 2,184 3% 5% 4% 2,001 2,066 2,213 -1% 1% -1% Domestic 2,226 2,259 2,269 2,281 2% 0% 1% 2,268 2,239 2,314 0% 1% -1% Exports 1,141 1,000 997 1,023 -12% 0% 3% 1,045 1,007 1,051 -4% -1% -3% North America 1,924 1,923 1,917 1,967 0% 0% 3% 1,906 1,837 1,916 1% 4% 3% Latin America 1,833 1,764 1,766 1,794 -4% 0% 2% 1,736 1,689 1,744 2% 5% 3% Specialty 2,781 2,770 2,817 2,877 0% 2% 2% 2,748 2,701 2,789 1% 4% 3%
Cash Cogs (US$/ton) 869 844 801 790 -3% -5% -1% 851 809 796 -1% -1% -1% Source: J.P. Morgan estimates, company data.
Investment Thesis, Valuation and Risks
Gerdau S.A. (Neutral; Price Target: R$16.50) Investment Thesis We rate Gerdau Neutral as we believe valuations remain expensive and we see limited upside to our estimates. The company’s earnings should recover from the
3 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
1Q13 bottom; however, the pace of recovery should be slower than we had originally expected, and the visibility of the recovery remains limited. That said, we see Gerdau as our preferred steel exposure, especially relative to Brazilian flat steel producers.
Within the challenging steel sector, Gerdau has a relatively better top-down (exposed to Brazil’s growing construction demand and recovery of US non-residential construction segment) and bottom-up story (improving product mix and rising iron ore exposure). In addition, the lack of other compelling investment alternatives in the Brazilian steel sector (we rate both CSN and Usiminas as UW), should mean that Gerdau will be viewed as a relative “safe haven” for exposure in the steel sector in Brazil.
Valuation Our Dec 2013 price target for Gerdau is R$16.50. As with other steel companies, we value Gerdau based on a combination of DCF (80%) and multiples (20%). In our DCF we use a 9.7% discount rate composed of a cost of equity of 11.7% and an after-tax cost of debt of 5.3%, which gives us a value of R$17.8. For multiple analysis, we use a target EV/EBITDA of 6.5x, a slight premium to Gerdau’s historical multiple average, on our 2014E adjusted EBITDA, which gives us a price of R$10.9.
Risks to Rating and Price Target The main upside/downside risks to our Neutral rating and price target would come from better/worse than expected growth in the global and/or domestic economy. If this were to happen, we could see volumes above/below our expectations and prices going higher/lower than we currently assume. We also see risks related to overpaying for potential acquisitions (as it has done in the past), capex execution, and cost overruns in capacity expansion. On the other hand, potentially accretive acquisitions and lower than expected capex would add upside risks to our estimates.
4 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Metalurgica Gerdau: Maintain OW; An Alternative for Exposure to Gerdau
Table 4: Metalúrgica Gerdau: Sum-of-the-Parts Valuation S.No. Particulars Unit JPM A Nº of GGBR3 Shares Owned Thousands 439,482 B GGBR3 Stock Price BRL 16.50
C Nº of GGBR4 Shares Owned Thousands 252,841 D GGBR4 Stock Price BRL 16.50 e = a*b+c*d Metalúrgica Gerdau Stake in Gerdau S.A. (R$M) 11,423
f Metalúrgica Gerdau Stake in Other Investments (31st Mar. 2013) (R$M) 1,574
g = e+f Metalúrgica Gerdau SOTP Equity Value (R$M) 12,998
h Net Debt - Metalúrgica Gerdau (Holding) (31st Mar. 2013) (R$M) 1,324
i = g – h Metalúrgica Gerdau SOTP Equity Value (Adjusted) (R$M) 11,673
j Holding Company Discount % 10%
k = i*(1-j) Metalúrgica Gerdau SOTP Estimated Equity Value (Adj) (R$M) 10,506
l Nº of GOAU3 Shares Thousands 137,619 m Nº of GOAU4 Shares Thousands 268,805 n = l + m Total number of Metalúrgica Gerdau Shares Thousands 406,424
o = k / n Metalurgica Gerdau - Price Per Share BRL 26.00 p = o/1.8 Metalurgica Gerdau - Price Per Share (at end'13 EoP FX of 2.05) USD 12.70
q GOAU4 Stock Price BRL 17.39 r GOAU4 Stock Price BRL 8.49
s = q/o-1 Upside - BRL % 50% t = r/p -1 Upside - USD % 47% Source: Company reports and J.P. Morgan estimates.
Figure 1: Discount to NAV in BRL (last two years) -18%
-19%
-20%
-21%
-22%
-23%
-24%
-25%
-26%
-27%
-28%
-29% May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13
Discount in BRL Average in BRL +1 STD DEV. -1 STD DEV. Source: Company reports, Bloomberg and J.P. Morgan estimates.
5 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Investment Thesis, Valuation and Risks
Metalurgica Gerdau (Overweight; Price Target: R$26.00) Investment Thesis We maintain our Overweight rating on Metalurgica Gerdau (GOAU4) and continue to see its shares as an alternative way to buy long steel exposure through its holdings in Gerdau S.A. (Neutral). Metalúrgica continues to trade at a substantial discount to its estimated NAV, which we believe is unwarranted, especially since it grants 100% tag-along rights to minorities of both types of shares and offers a higher dividend yield vs. Gerdau. Our Dec 2013 price target for GOAU4 is R$26.0.
Valuation Our Overweight rating and Dec 2013 price target of R$26.0 (or US$12.7 as JPM’s end 2013 BRL/USD forecast is 2.05) for Metalurgica Gerdau are based on a sum-of- the-parts valuation with a holding discount to NAV of 10%. In the SOTP we value Metalúrgica’s particiaption in Gerdau BG Participações and other assets. The stake in Gerdau S.A. is valued in the SOTP taking our estimated fair value for GGBR4 shares, which is extended to GGBR3 shares. We estimate the fair value for Gerdau (GGBR4) with a combination of DCF (80% weight) and multiples (20% weight) analysis. In our DCF, we use a 9.7% discount rate composed of a cost of equity of 11.7% and an after-tax cost of debt of 5.3%. Please see Table 4 above for the sum-of- the-parts calculations.
Risks to Rating and Price Target The main risk to our rating and price target for Metalúrgica comes from its exposure to the steel market, especially at the Gerdau level. A slowdown in global and/or domestic economic growth could impact steel demand and weaken prices. In addition, Gerdau has been an active consolidator; even though the company has been disciplined in its moves, there is a risk that it might overpay widely contested assets. We see further risks related to capex execution and cost overruns from Gerdau that could negatively impact our valuation and price target. Finally, Metalúrgica is also exposed to foreign currency, inflation, and interest rate risks, and any unfavorable movement in these variables could adversely impact the earnings and share price performance.
6 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Gerdau S.A.: Summary of Financials Income Statement FY12A FY13E FY14E FY15E FY16E Balance Sheet FY12A FY13E FY14E FY15E FY16E Revenues 37,982 39,412 41,941 46,640 49,446 Cash 2,497 2,231 2,397 1,835 2,698 COGS ex D&A (31,407) (32,696) (34,197) (37,728) (39,562) Accounts receivable 3,695 4,765 5,071 5,639 5,978 SG&A (2,472) (2,647) (2,795) (3,085) (3,271) Inventories 9,022 8,795 8,857 9,771 10,246 Depreciation (1,827) (1,878) (1,878) (1,982) (2,080) Other current assets 1,197 1,168 1,243 1,382 1,465 EBITDA 4,176 4,201 5,038 5,926 6,718 Total Current Assets 16,410 16,959 17,567 18,627 20,387 EBITDA margin 11.0% 10.7% 12.0% 12.7% 13.6% Net PP&E 19,690 19,638 19,560 19,279 18,799 Financial income 317 120 54 58 34 Other assets 16,993 16,729 16,752 17,527 17,989 Financial expense (953) (841) (795) (859) (814) Total assets 53,093 53,326 53,880 55,433 57,176 FX & Monetary gains (losses) (134) (37) (218) (121) (109) Short-term debt 2,582 3,393 3,195 3,026 3,055 Other Nonoperarting income (153) (64) (246) (152) (142) Accounts payable 3,060 3,170 3,315 3,657 3,835 Equity income 0 0 0 0 0 Other current liabilities 2,181 1,638 1,324 1,472 1,561 EBT 1,559 1,538 2,174 2,991 3,716 Total Current Liabilities 7,823 8,201 7,834 8,156 8,451 Taxes (63) (253) (358) (492) (612) Long-term debt 12,086 11,822 11,130 10,542 10,642 Minority interest (71) (91) (129) (178) (221) Deferred taxes 1,796 1,242 1,242 1,242 1,242 Extraordinary 0 0 - - - Other liabilities 2,590 2,781 3,064 3,407 3,612 Net income 1,426 1,193 1,687 2,321 2,883 Total liabilities 24,295 24,045 23,270 23,346 23,946 Net Income Recurring 1,426 1,193 1,687 2,321 2,883 Minority Interests 1,552 1,458 1,458 1,458 1,458 Net income margin (recurring) 3.8% 3.0% 4.0% 5.0% 5.8% Shareholders' equity 27,246 27,823 29,151 30,629 31,772 EPS 0.84 0.70 0.99 1.36 1.70 Liabilities + Equity 53,093 53,326 53,880 55,433 57,176 EPS Recurring 0.84 0.70 0.99 1.36 1.70 Revenue growth 7.3% 3.8% 6.4% 11.2% 6.0% Net debt 12,172 12,985 11,929 11,733 10,999 EBITDA growth (10.2%) 0.6% 19.9% 17.6% 13.4% Net Debt/Capital 28.0% 29.2% 26.5% 25.7% 23.4% Net income growth (28.9%) (16.3%) 41.4% 37.6% 24.3% Debt/Capital 33.7% 34.2% 32.2% 30.2% 30.0% FCF growth (204.8%) (105.2%) 2917.2% (18.0%) 85.2% Net Debt/EBITDA 2.9 3.1 2.4 2.0 1.6 Operating Data, Ratios FY12A FY13E FY14E FY15E FY16E Valuation, Macro FY12A FY13E FY14E FY15E FY16E Capex 3,128 2,000 1,800 1,700 1,600 EV/EBITDA 8.5 9.0 7.6 6.6 5.7 Change in working capital 946 1,313 665 1,225 687 P/E 15.5 19.3 14.4 10.8 8.8 Free cash flow (1,351) 71 2,140 1,755 3,249 P/BV 0.9 0.8 0.8 0.8 0.7 Dividends 523 276 358 843 1,740 EV/tonne 1,988 1,973 1,838 1,691 1,613 Dividend % of net income 36.7% 23.1% 21.2% 36.3% 60.4% FCF yield (5.8%) 0.3% 9.2% 7.5% 14.0% Capex/depreciation 1.7 1.1 1.0 0.9 0.8 Dividend yield 2.3% 1.2% 1.5% 3.6% 7.5% CAPEX/sales 8.2% 5.1% 4.3% 3.6% 3.2% ROE 5.2% 4.3% 5.8% 7.6% 9.1% Working capital 9,392 10,705 11,370 12,595 13,282 Net income margin 3.8% 3.0% 4.0% 5.0% 5.8% Working capital/sales 24.7% 27.2% 27.1% 27.0% 26.9% Net revenue/Assets 71.5% 73.9% 77.8% 84.1% 86.5% Assets/Equity 1.9 1.9 1.8 1.8 1.8 Shipments 18,594 19,104 19,928 21,552 22,134 ROIC 4.3% 2.7% 5.3% 6.7% 7.7% Avg price/t 2,043 2,063 2,105 2,164 2,234 Shares 1,701 1,701 1,701 1,701 1,701 Cash COGS/t 1,689 1,711 1,716 1,751 1,787 ADRs 1,701 1,701 1,701 1,701 1,701 EBITDA/t 225 220 253 275 304 WACC Shipments chg (2.8%) 2.7% 4.3% 8.2% 2.7% Perpetual Growth Avg price/t chg 10.4% 1.0% 2.0% 2.8% 3.2% Cost of equity Cash COGS/t chg 13.3% 1.3% 0.3% 2.0% 2.1% Cost of debt EBITDA/t chg (7.6%) (2.1%) 15.0% 8.8% 10.4% Capex 3,128 2,000 1,800 1,700 1,600 Maintenance 1,255 1,330 900 850 800 Expansion 1,873 670 900 850 800
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data).Fiscal year ends Dec
7 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
8 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Other Companies Recommended in This Report (all prices in this report as of market close on 23 May 2013) CSN (SID/$3.46/Underweight), Usiminas (USIM5.SA/R$9.22/Underweight) Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. In compliance with Instruction 483 issued by Comissao de Valores Mobiliarios (the Brazilian securities commission) on July 6, 2010, the Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal views about the securities and issuers; (2) that all recommendations issued by him or her were independently produced, including from the entity in which he or she is an employee; and (3) that he or she will set forth any situation or conflict of interest believed to impact the impartiality of the recommendations herein, as per article 17, II of Instruction 483. Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Gerdau S.A., Metalurgica Gerdau within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Gerdau S.A., Metalurgica Gerdau. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Gerdau S.A., Metalurgica Gerdau. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Gerdau S.A., Metalurgica Gerdau. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Gerdau S.A., Metalurgica Gerdau. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Gerdau S.A., Metalurgica Gerdau. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Gerdau S.A., Metalurgica Gerdau. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Gerdau S.A., Metalurgica Gerdau. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan– covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].
9 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Gerdau S.A. (GGBR4.SA, GGBR4 BZ) Price Chart Date Rating Share Price Price Target (R$) (R$) 70 30-Jun-08 OW 37.30 54.00 OW R$24OW R$36 OW R$18.5 23-Jan-09 OW 15.51 26.70 06-Mar-09 N 11.48 15.00 56 N R$15OW R$27 N R$19.5 OW R$20 27-May-09 OW 18.70 24.00 20-Jul-09 OW 20.68 30.00 OW R$54OW R$26.7OW R$30OW R$35OW R$33.5N R$28.5N R$18.5 N R$19 N R$21N R$20.5 42 03-Sep-09 OW 21.25 27.00 Price(R$) 10-Dec-09 OW 30.05 36.00 02-Feb-10 OW 26.60 35.00 28 04-Jun-10 OW 24.01 33.50 10-Nov-10 N 23.09 28.50 14 24-May-11 N 16.70 18.50 23-Aug-11 N 12.70 19.50 04-Jan-12 N 15.40 19.00 0 30-Jul-12 N 18.28 21.00 Oct Jul Apr Jan Oct Jul Apr Jan Oct 06 07 08 09 09 10 11 12 12 26-Nov-12 N 18.85 20.50 22-Feb-13 OW 16.21 20.00 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jun 30, 2008. 07-May-13 OW 14.50 18.50
Metalurgica Gerdau (GOAU4.SA, GOAU4 BZ) Price Chart
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OW R$30 72 Date Rating Share Price Price Target (R$) (R$) OW R$50 OW R$41OW R$28OW R$29OW R$32OW R$31.5 22-Feb-10 OW 32.40 50.00 54 Price(R$) 10-Nov-10 OW 27.50 41.00 24-May-11 OW 20.70 28.00 36 23-Aug-11 OW 16.00 30.00 04-Jan-12 OW 19.11 29.00
18 30-Jul-12 OW 23.03 32.00 22-Feb-13 OW 20.37 31.50
0 Oct Jul Apr Jan Oct Jul Apr Jan Oct 06 07 08 09 09 10 11 12 12
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Feb 22, 2010.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.
10 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
Coverage Universe: Angele, Rodolfo R: Bradespar (BRAP4.SA), CSN (SID), Gerdau S.A. (GGBR4.SA), Grupo Mexico (GMEXICOB.MX), MMX (MMXM3.SA), MMX Royalty Securities (MMXM11.SA), Magnesita (MAGG3.SA), Metalurgica Gerdau (GOAU4.SA), Southern Copper Corporation (SCCO), Ternium (TX), Usiminas (USIM5.SA), Vale ON (VALE), Vale PN (VALEp)
J.P. Morgan Equity Research Ratings Distribution, as of March 30, 2013 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 43% 44% 13% IB clients* 54% 47% 38% JPMS Equity Research Coverage 42% 50% 9% IB clients* 74% 64% 57% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
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11 Rodolfo Angele, CFA Latin America Equity Research (55-11) 4950-3888 24 May 2013 [email protected]
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