Intrinsic value of Russel Metals Inc. - RUS

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$26.30

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$26.30

 
Intrinsic value

$3.19

 
Up/down potential

-88%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of RUS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -17.13
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  2,579
  2,631
  2,691
  2,760
  2,838
  2,924
  3,018
  3,121
  3,232
  3,352
  3,481
  3,619
  3,765
  3,922
  4,088
  4,264
  4,451
  4,649
  4,858
  5,079
  5,313
  5,559
  5,819
  6,092
  6,381
  6,684
  7,004
  7,341
  7,695
  8,068
  8,460
Variable operating expenses, $m
 
  2,704
  2,766
  2,837
  2,917
  3,005
  3,102
  3,208
  3,322
  3,445
  3,577
  3,716
  3,867
  4,027
  4,198
  4,379
  4,571
  4,774
  4,989
  5,216
  5,456
  5,709
  5,975
  6,256
  6,553
  6,865
  7,193
  7,539
  7,903
  8,285
  8,688
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  2,460
  2,704
  2,766
  2,837
  2,917
  3,005
  3,102
  3,208
  3,322
  3,445
  3,577
  3,716
  3,867
  4,027
  4,198
  4,379
  4,571
  4,774
  4,989
  5,216
  5,456
  5,709
  5,975
  6,256
  6,553
  6,865
  7,193
  7,539
  7,903
  8,285
  8,688
Operating income, $m
  119
  -74
  -75
  -77
  -79
  -82
  -84
  -87
  -90
  -93
  -97
  -98
  -101
  -106
  -110
  -115
  -120
  -125
  -131
  -137
  -143
  -150
  -157
  -164
  -172
  -180
  -189
  -198
  -207
  -217
  -228
EBITDA, $m
  154
  -38
  -39
  -40
  -41
  -42
  -44
  -45
  -47
  -49
  -50
  -52
  -55
  -57
  -59
  -62
  -65
  -67
  -70
  -74
  -77
  -81
  -84
  -88
  -93
  -97
  -102
  -106
  -112
  -117
  -123
Interest expense (income), $m
  23
  19
  20
  21
  22
  23
  25
  26
  28
  29
  31
  33
  36
  38
  41
  43
  46
  49
  52
  56
  59
  63
  67
  71
  76
  80
  85
  90
  96
  101
  107
Earnings before tax, $m
  97
  -93
  -95
  -98
  -101
  -105
  -109
  -113
  -118
  -123
  -128
  -131
  -137
  -144
  -151
  -158
  -166
  -174
  -183
  -193
  -202
  -213
  -224
  -235
  -248
  -260
  -274
  -288
  -303
  -319
  -335
Tax expense, $m
  34
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  63
  -93
  -95
  -98
  -101
  -105
  -109
  -113
  -118
  -123
  -128
  -131
  -137
  -144
  -151
  -158
  -166
  -174
  -183
  -193
  -202
  -213
  -224
  -235
  -248
  -260
  -274
  -288
  -303
  -319
  -335

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  182
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,509
  1,354
  1,385
  1,421
  1,461
  1,505
  1,553
  1,606
  1,664
  1,725
  1,792
  1,862
  1,938
  2,018
  2,104
  2,195
  2,291
  2,393
  2,500
  2,614
  2,734
  2,861
  2,995
  3,136
  3,284
  3,440
  3,605
  3,778
  3,960
  4,152
  4,354
Adjusted assets (=assets-cash), $m
  1,327
  1,354
  1,385
  1,421
  1,461
  1,505
  1,553
  1,606
  1,664
  1,725
  1,792
  1,862
  1,938
  2,018
  2,104
  2,195
  2,291
  2,393
  2,500
  2,614
  2,734
  2,861
  2,995
  3,136
  3,284
  3,440
  3,605
  3,778
  3,960
  4,152
  4,354
Revenue / Adjusted assets
  1.943
  1.943
  1.943
  1.942
  1.943
  1.943
  1.943
  1.943
  1.942
  1.943
  1.943
  1.944
  1.943
  1.944
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
  1.943
Average production assets, $m
  315
  321
  328
  337
  346
  357
  368
  381
  394
  409
  425
  441
  459
  478
  499
  520
  543
  567
  593
  620
  648
  678
  710
  743
  778
  816
  855
  896
  939
  984
  1,032
Working capital, $m
  818
  684
  700
  718
  738
  760
  785
  811
  840
  872
  905
  941
  979
  1,020
  1,063
  1,109
  1,157
  1,209
  1,263
  1,321
  1,381
  1,445
  1,513
  1,584
  1,659
  1,738
  1,821
  1,909
  2,001
  2,098
  2,200
Total debt, $m
  331
  309
  324
  342
  361
  383
  407
  433
  461
  491
  523
  558
  595
  634
  676
  720
  767
  817
  870
  925
  984
  1,046
  1,111
  1,180
  1,253
  1,329
  1,410
  1,495
  1,584
  1,677
  1,776
Total liabilities, $m
  683
  662
  677
  695
  714
  736
  760
  786
  814
  844
  876
  911
  948
  987
  1,029
  1,073
  1,120
  1,170
  1,223
  1,278
  1,337
  1,399
  1,464
  1,533
  1,606
  1,682
  1,763
  1,848
  1,937
  2,030
  2,129
Total equity, $m
  825
  692
  708
  726
  746
  769
  794
  821
  850
  882
  915
  952
  990
  1,031
  1,075
  1,121
  1,171
  1,223
  1,278
  1,336
  1,397
  1,462
  1,530
  1,602
  1,678
  1,758
  1,842
  1,931
  2,024
  2,122
  2,225
Total liabilities and equity, $m
  1,508
  1,354
  1,385
  1,421
  1,460
  1,505
  1,554
  1,607
  1,664
  1,726
  1,791
  1,863
  1,938
  2,018
  2,104
  2,194
  2,291
  2,393
  2,501
  2,614
  2,734
  2,861
  2,994
  3,135
  3,284
  3,440
  3,605
  3,779
  3,961
  4,152
  4,354
Debt-to-equity ratio
  0.401
  0.450
  0.460
  0.470
  0.480
  0.500
  0.510
  0.530
  0.540
  0.560
  0.570
  0.590
  0.600
  0.610
  0.630
  0.640
  0.660
  0.670
  0.680
  0.690
  0.700
  0.720
  0.730
  0.740
  0.750
  0.760
  0.770
  0.770
  0.780
  0.790
  0.800
Adjusted equity ratio
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511
  0.511

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  63
  -93
  -95
  -98
  -101
  -105
  -109
  -113
  -118
  -123
  -128
  -131
  -137
  -144
  -151
  -158
  -166
  -174
  -183
  -193
  -202
  -213
  -224
  -235
  -248
  -260
  -274
  -288
  -303
  -319
  -335
Depreciation, amort., depletion, $m
  35
  35
  36
  37
  38
  39
  40
  42
  43
  44
  46
  45
  47
  49
  51
  53
  55
  58
  60
  63
  66
  69
  72
  76
  79
  83
  87
  91
  96
  100
  105
Funds from operations, $m
  227
  -57
  -59
  -61
  -63
  -66
  -68
  -71
  -75
  -78
  -82
  -86
  -90
  -95
  -100
  -105
  -111
  -117
  -123
  -129
  -136
  -144
  -151
  -159
  -168
  -177
  -187
  -197
  -207
  -218
  -230
Change in working capital, $m
  55
  13
  16
  18
  20
  22
  25
  27
  29
  31
  33
  36
  38
  41
  43
  46
  49
  51
  54
  57
  61
  64
  68
  71
  75
  79
  83
  88
  92
  97
  102
Cash from operations, $m
  172
  -87
  -75
  -79
  -83
  -88
  -93
  -98
  -103
  -109
  -115
  -122
  -128
  -136
  -143
  -151
  -159
  -168
  -177
  -187
  -197
  -208
  -219
  -231
  -243
  -256
  -270
  -284
  -299
  -315
  -332
Maintenance CAPEX, $m
  0
  -32
  -33
  -34
  -34
  -35
  -36
  -38
  -39
  -40
  -42
  -43
  -45
  -47
  -49
  -51
  -53
  -55
  -58
  -60
  -63
  -66
  -69
  -72
  -76
  -79
  -83
  -87
  -91
  -96
  -100
New CAPEX, $m
  -17
  -6
  -7
  -8
  -9
  -10
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -26
  -27
  -28
  -30
  -32
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -48
Cash from investing activities, $m
  26
  -38
  -40
  -42
  -43
  -45
  -48
  -51
  -53
  -55
  -58
  -60
  -63
  -66
  -69
  -73
  -76
  -79
  -84
  -87
  -91
  -96
  -101
  -105
  -111
  -116
  -122
  -128
  -134
  -141
  -148
Free cash flow, $m
  198
  -126
  -115
  -121
  -127
  -134
  -141
  -148
  -156
  -164
  -173
  -182
  -191
  -202
  -212
  -223
  -235
  -248
  -261
  -274
  -289
  -304
  -320
  -336
  -354
  -373
  -392
  -412
  -434
  -457
  -480
Issuance/(repayment) of debt, $m
  -60
  13
  15
  17
  20
  22
  24
  26
  28
  30
  32
  35
  37
  39
  42
  44
  47
  50
  53
  56
  59
  62
  65
  69
  73
  76
  80
  85
  89
  94
  99
Issuance/(repurchase) of shares, $m
  1
  0
  115
  121
  128
  135
  142
  149
  157
  165
  174
  183
  193
  203
  214
  225
  237
  250
  263
  277
  291
  307
  323
  340
  357
  376
  396
  416
  438
  461
  485
Cash from financing (excl. dividends), $m  
  -59
  13
  130
  138
  148
  157
  166
  175
  185
  195
  206
  218
  230
  242
  256
  269
  284
  300
  316
  333
  350
  369
  388
  409
  430
  452
  476
  501
  527
  555
  584
Total cash flow (excl. dividends), $m
  132
  -112
  -99
  -103
  -108
  -112
  -117
  -122
  -128
  -134
  -140
  -147
  -154
  -162
  -170
  -179
  -188
  -198
  -208
  -219
  -230
  -242
  -254
  -268
  -282
  -296
  -312
  -328
  -345
  -363
  -382
Retained Cash Flow (-), $m
  44
  -14
  -16
  -18
  -20
  -23
  -25
  -27
  -29
  -32
  -34
  -36
  -39
  -41
  -44
  -46
  -49
  -52
  -55
  -58
  -61
  -65
  -68
  -72
  -76
  -80
  -84
  -89
  -93
  -98
  -103
Prev. year cash balance distribution, $m
 
  147
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  21
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  20
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  92.3
  84.9
  78.0
  71.6
  65.5
  59.8
  54.6
  49.7
  45.2
  41.1
  37.3
  33.8
  30.6
  27.7
  25.0
  22.6
  20.4
  18.4
  16.6
  14.9
  13.5
  12.1
  10.9
  9.8
  8.8
  7.9
  7.1
  6.4
  5.7

Russel Metals Inc. processes and distributes steel and other metal products in Canada and the United States. The company operates in three segments: Metals Service Centers, Energy Products, and Steel Distributors. The Metals Service Centers segment sells plates, and flat rolled carbon and other general line carbon steel products comprising structurals, bars, sheets, pipes, tubing, and hollow structural steel tubing products, as well as stainless steel, aluminum, and other non-ferrous specialty metal products in various sizes, shapes, and specifications. It also provides customized processing services. This segment serves end users in various industries, including machinery and equipment manufacturing, construction, and shipbuilding, as well as natural resources industries, such as mining and petroleum. The Energy Products segment distributes oil country tubular goods, line pipes, tubes, flanges, valves, and fittings, as well as processes and distributes steel pipe products. This segment serves energy, construction, manufacturing, pulp and paper, mining, and ski industries, as well as oil and gas, industrial, and resource markets. The Steel Distributors segment distributes steel products comprising carbon steel, plates, beams, channels, flat rolled products, and rail and pipe products to other steel service centers and large equipment manufacturers. Russel Metals Inc. was founded in 1929 and is headquartered in Mississauga, Canada.

FINANCIAL RATIOS  of  Russel Metals Inc. (RUS)

Valuation Ratios
P/E Ratio 25.8
Price to Sales 0.6
Price to Book 2
Price to Tangible Book
Price to Cash Flow 9.4
Price to Free Cash Flow 10.5
Growth Rates
Sales Growth Rate -17.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -55.3%
Cap. Spend. - 3 Yr. Gr. Rate -8.8%
Financial Strength
Quick Ratio 5
Current Ratio 0
LT Debt to Equity 35.9%
Total Debt to Equity 40.1%
Interest Coverage 5
Management Effectiveness
Return On Assets 5%
Ret/ On Assets - 3 Yr. Avg. 3.3%
Return On Total Capital 5.2%
Ret/ On T. Cap. - 3 Yr. Avg. 2.5%
Return On Equity 7.4%
Return On Equity - 3 Yr. Avg. 3.8%
Asset Turnover 1.7
Profitability Ratios
Gross Margin 19.5%
Gross Margin - 3 Yr. Avg. 17.8%
EBITDA Margin 6%
EBITDA Margin - 3 Yr. Avg. 3.9%
Operating Margin 4.6%
Oper. Margin - 3 Yr. Avg. 2.5%
Pre-Tax Margin 3.8%
Pre-Tax Margin - 3 Yr. Avg. 1.7%
Net Profit Margin 2.4%
Net Profit Margin - 3 Yr. Avg. 0.9%
Effective Tax Rate 35.1%
Eff/ Tax Rate - 3 Yr. Avg. 25.5%
Payout Ratio 149.2%

RUS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the RUS stock intrinsic value calculation we used $2579 million for the last fiscal year's total revenue generated by Russel Metals Inc.. The default revenue input number comes from 2016 income statement of Russel Metals Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our RUS stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for RUS is calculated based on our internal credit rating of Russel Metals Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Russel Metals Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of RUS stock the variable cost ratio is equal to 102.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for RUS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 6.4% for Russel Metals Inc..

Corporate tax rate of 27% is the nominal tax rate for Russel Metals Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the RUS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for RUS are equal to 12.2%.

Life of production assets of 9.8 years is the average useful life of capital assets used in Russel Metals Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for RUS is equal to 26%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $825 million for Russel Metals Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 62.453 million for Russel Metals Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Russel Metals Inc. at the current share price and the inputted number of shares is $1.6 billion.


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Stock chart of RUS Financial statements of RUS
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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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