German Industry

German Industry: Thyssenkrupp Recovery

As Germany's manufacturing sector looks to be recovering from the global pandemic, Thyssenkrupp's stock rallies strongly 

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30th December 2020, 13:00 GMT 

Germany’s economy looks to be recovering from the troughs of pandemic’s economic consequences, with the manufacturing sector outperforming the services sector. IHS Markit released flash PMI data for Germany 10 days ago which showed significant expansion in the manufacturing sector: Manufacturing PMI registered at 58.6 (>50 is expansion), a 34 month high. 

 

PMI, or Purchasing Manager’s index, surveys the expectations and sentiment of supply chain managers across sectors. These managers have a very good idea of current and future output, supply chain issues, and demand. The PMI data can therefore be used as a leading indicator of how the economy will perform. 

 

Thyssenkrupp is a German multinational conglomerate that focuses on steel production, industrial engineering and other raw materials trading. Thyssenkrupp released their annual report for the 2020 FY in November, showing a significant YoY Improvement. Thyssenkrupp’s CEO Martina Merz, since her appointment at the start of the FY has been trying to turn around Thyssenkrupp which has had years of inconsistent or poor performance. The strategy employed has been that of consolidation and reallocation of capital to develop individual businesses of Thyssenkrupp’s and restructure their portfolio, bringing the company away from its past dependency on steel markets. Thyssenkrupp has created more of a separation between their businesses, developing where there is potential, and looking to cut off deadwood. 

 

Thyssenkrupp performed well this year, despite the pandemic hitting hard. Net Income was 9.5bn euros, ThyssenKrupp has struggled to make a profit of more than 8 million in the past 5 years. It must also be considered that the sale of their Elevator business would have skewed this year’s data.

 

Thyssenkrupp’s steel business still performed badly, and they have been looking into either getting Government aid for the steel business or selling it off (partially or fully). Adjusted EBIT for Thyssenkrupp Steel Europe was -946 million euros and Steel Europe accounts for roughly 21% of total revenue.

 

Thyssenkrupp rejected the government aid recently, and have received a non-binding offer from British company Liberty Steel (part of Sanjeev Gupta’s Liberty House group) for their steel business. Deutsche Bank estimated the deal would yield synergies of 200-300 million euros. Liberty are now performing due diligence. A deal is likely for a few reasons: (1) Thyssenkrupp have decided not to accept an injection of Government money to save and develop their steel business; (2) Other potential acquisitors such as Tata have more regulatory hurdles due to regulators’ aversion to acquisitions resulting in monopolistic control (Liberty has limited overlap with Thyssenkrupp Steel) ; (3) The deal would reduce Liberty Steel’s reliance on the 3 million tonnes of slab and hot-rolled coil it buys each year for its manufacturing lines.

 

The net asset value of Thyssenkrupp is about 10bn euros, while the market cap is roughly half that at about 5.1bn. The P/E is less than 1 because of the large net income this year. Thyssenkrupp’s stock has been shooting up recently, up about 17% over the week. The company could therefore see a huge jump in their stock valuation with the potential sale of their steel assets, while investors also look to pour money into german manufacturers with the next 6 months looking bright for the German manufacturing sector.

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German Economy

Manufacturing Sector

Thyssenkrupp