We set our 13 €/share target price for Acerinox using the average of DCF-based NPV and EV/EBITDA multiple. While NPV reflects the long-term normalised value for the stock, EV/EBITDA multiple helps better reflect the latest investor perception towards steel sector earnings, in our view. We arrive at a DCF-based valuation for the stainless steel business using a WACC of 8% and terminal growth of 1%. To this, we add the value of its stake in associates and JVs at a discount to book value. From the resulting valuation, we deduct pension liabilities, net debt, and minorities. We use 5x multiple for the stock, slightly lower than its long-term average.

We see the main risks that could cause the shares to deviate from our target price as: corporate activity; industry cyclicality (the stainless steel industry is highly correlated to economic cycles); oversupply (the supply/demand balance is one of the industry's biggest concerns at the moment, as there has been a significant amount of additional capacity deployed in China over the last decade); nickel prices (a key material for certain types of stainless steel); substitution with other materials; strikes; and exchange rates (given the group's operations on different continents).

If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. Likewise, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target.