Gerdau’s Unexpected Financial Windfall and Its Market Implications

On a day when Brazil’s Ibovespa index fell, Gerdau’s shares defied the broader market’s negative sentiment.

The steelmaker’s preferred shares (GGBR4) rose by 2.33% to R$18.48. Meanwhile, the Ibovespa dropped by 0.90% to 136,104 points.

This positive performance followed an important announcement. Gerdau Aços Longos, a subsidiary of Gerdau, successfully reclaimed R$1.77 billion (approximately $316 million) from judicial deposits.

These funds relate to a legal case involving the exclusion of ICMS, a value-added tax, from the PIS and Cofins tax bases.

Brazil’s Supreme Federal Court (STF) made this ruling in 2017. Gerdau stopped paying these taxes following the decision and sought reimbursement for amounts previously paid.

Additionally, Gerdau announced plans to file a credit qualification request with Brazil‘s Federal Revenue Service.

The company aims to offset R$786 million ($140 million) in tax credits related to overpaid taxes.

This unexpected financial boost surprised investors. Many had not anticipated the return of these funds within the year.

Ativa Investments noted that the recovered amount represents nearly 5% of Gerdau’s market capitalization.

As of the previous day’s close, Gerdau’s market cap stood at R$37.4 billion ($6.68 billion).

Goldman Sachs views this inflow of funds as significantly enhancing Gerdau’s financial flexibility. The influx improves the chances of approving share buyback programs.

Additionally, it strengthens the company’s ability to pay dividends. Goldman Sachs analysts who have been optimistic about Gerdau’s prospects reiterated their “buy” recommendation.

They set a price target of R$25. They argue that the company’s current stock price does not fully reflect its strong fundamentals.

Gerdau’s Recent Performance and Future Outlook

Despite these positive developments, Gerdau’s shares have underperformed since May. The shares declined by 3.6%, with a year-to-date drop of 6.4%. Analysts attribute this weak performance to concerns over China’s steel market.

The Chinese government is pushing exports at the expense of profitability. Moreover, there are worries about pressure on Gerdau’s North American operations.

Goldman Sachs analysts emphasized the resilience of the North American margins. These margins have remained strong over the years.

The company operates in a niche steel market focused on infrastructure. This segment has benefited from U.S. government incentives for infrastructure projects.

Analysts also noted that Germany’s North American operations are “significantly undervalued.”

These operations contribute nearly 50% of the company’s EBITDA. Revaluing these operations to match their American peers could add 34% to Gerdau’s market value.

In Brazil, Gerdau has improved its margins through a combination of better domestic prices and reduced costs.

Import tariffs and the depreciation of the real have boosted domestic prices. Meanwhile, the company has implemented operational optimizations to reduce costs.

This financial windfall and the strategic positioning of Gerdau’s operations, particularly in North America, underscore the potential for future growth.

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