I have been keeping an eye on Acerinox (OTC:ANIOF) (OTCPK:ANIOY) for the past two years, and in an April 2019 article I was very satisfied to see the dividend yield increase to 5.4% based on the share price of around 9.25 EUR back then. Since that article, a lot has happened as Acerinox pursued an interesting value-add acquisition in the specialty metals business (to have less exposure to the more cyclical nature of its core business) and I was looking forward to see how the company is getting through the COVID-19 pandemic.

Source: Yahoo Finance

Acerinox has a primary listing on the Madrid Stock Exchange where it’s trading with ACX as ticker symbol. The average daily volume of almost 700,000 shares is clearly superior to the volume on any of the secondary listings. The current market capitalization is approximately 1.9B EUR.

The H1 results were quite strong

Acerinox obviously wasn’t able to get through the COVID-19 pandemic unharmed as its revenue decreased by almost 5% to 2.33B EUR, and this resulted in an operating profit of just 33.7M EUR, down more than 60% from the 99.6M EUR in H1 2019. However, as you can see in the image below, the low operating income was caused by a 42.5M EUR impairment charge, and excluding this impairment, the operating profit would have been around 76M EUR, just 24% lower than in H1 2019.

Source: H1 2020 financial results

And that’s actually pretty decent as the 110M EUR revenue reduction resulted in a reduction of the operating income by just 23.5M EUR.

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As Acerinox also wrapped up a relatively sizable acquisition last year, its net finance expense of almost 15M EUR was higher than the 8M EUR in H1 2019, and the pre-tax income fell to 22.4M EUR. We also see how Acerinox was hit with a 24.1M EUR tax bill for a tax pressure of almost 110%. As you can probably guess, this is related to non-recurring items. The high tax bill is related to the impairment charges and Acerinox’s decision to not use deferred tax assets right now. In a normalized scenario, the tax bill would have been around 7-8M EUR and Acerinox would have reported a profit.

So although the net income is negative, it’s pretty clear the reason for the net loss are the non-cash impairment charges, and I expected the cash flow statement to show a healthy amount of free cash flow coming in.

Acerinox recorded an operating cash inflow of 75.1M EUR (including a 26.7M EUR tax payment) and a 34M EUR investment in the working capital position. Adjusted for these WC changes as well as the difference between taxes paid and taxes due (and I will use the recorded tax bill in the H1 2020 income statement), the operating cash flow of 111M EUR was more than sufficient to cover the 53M EUR capex and Acerinox reported a positive free cash flow result of around 58M EUR or 0.215/share.

Source: H1 2020 financial results

The dividend will be paid out later this year

The company had originally suspended the payment of the 0.50 EUR dividend it had previously declared over FY 2019. The Annual General Meeting will be held next week (on Oct. 22 ) and will decide on the dividend and we can reasonably expect the dividend proposal to be approved.

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The 0.50 EUR represents the same dividend as a year ago, which means that based on the current share price of just over 7 EUR, the dividend yield is just north of 7%, a pretty appealing yield. The dividend withholding tax in Spain is 19%, but the country obviously has double taxation treaties in place with most other first world countries to reduce the tax burden.

The dividend will cost Acerinox approximately 135M EUR and will be paid out in two tranches. A first tranche of 0.40 EUR will be payable on Dec. 2 while the second smaller tranche of 0.10 EUR will be paid one day later on Dec. 3 as a share premium refund (which may have a different taxation, depending on the jurisdiction of the shareholder).

As of the end of June, Acerinox had in excess of 1B EUR in cash on its balance sheet and a net debt of approximately 870M EUR, so the balance sheet is strong enough to make the 135M EUR payment even though the H1 2020 net los and incoming free cash flow indicate the dividend payment isn’t fully covered.

Source: company presentation

Investment thesis

I was very encouraged by Acerinox’ H1 results and I hope the company can confirm it’s on the right track when it publishes its Q3 and H2 results. Acerinox management must be pretty confident in continuing to perform well considering it’s keeping the dividend unchanged compared to last year’s dividend, and considering the dividend will be fully paid in cash.

At this point, the option premiums are pretty low. Writing a P7 for December would yield an option premium of less than 0.60 EUR which means there will barely be a premium at all considering a 0.50 EUR dividend will be detached and paid out by then. I noticed most option premiums for the next two months are pretty low at Acerinox, so perhaps the market maker is waiting for an official ex-dividend date before updating the option premiums?

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In any case, Acerinox is a “hold” in the Nest Egg Portfolio where we have a very small position of just around 1% of the portfolio value.

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Disclosure: I am/we are long ANIOF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.