Académique Documents
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EQUITYRESEARCH
METALS&MINING
RUSSIAN
STEELMAKERS
Remain Cautious as Costs Take Centre Stage
$84.3bn
16%
Figure1:Russiansteelheadingforanotherrollercoasterridein2011?
Target Potential
Rating Rating
price
upside
(old) (new)
($/share)
(%)
180
HOLD
BUY
BUY
BUY
160
140
120
100
SeverstalGDR
EvrazGDR
SBBRebarTracker
Dec10
Feb11
Source:Bloomberg,MetalExpert
SBBHRCTracker
Coststakecentrestagein2011.Webelievecostpressureswillriseaslabour,energy
andotherexpensesaddtorawmaterialpricehikes.Wedoubtthecurrenteconomic
environmentwouldallowforcoststobefullypassedontocustomers,sosteelmakers
mayhavetoabsorbsomeoftheburden,tothedetrimentoftheirmargins.
ArcelorMittal
RTSIndex
NLMKGDR
Baosteel
BBGIron/SteelCo
Index
MMKGDR
0%
Nov10
Mechel ADR
The2010correctionmayhavebeenlinkedtoEUdebtworries
Nov09
80
Oct09
3Mstock,indexandsteelperformance
Sep10
BUY
BUY
HOLD
BUY
Aug10
10.7%
17.2%
13.6%
24.9%
Jun10
42.30
16.20
49.40
22.10
May10
EvrazGroup
MMK
NLMK
Severstal
Willweseetheboombustpatternof2010repeatingitselfin2011?
200
Mar10
Company
Feb10
Potential upside
Dec09
WeraiseourtargetpricesforRussiansteelmakersEvraz,MMK,SeverstalandNLMKto
reflectstrengtheningsteelprices.However,weadvocateaselectiveapproachtostock
pickingin2011astheindustrycontinuestofaceanumberofchallengeswhichwe
believearenotyetreflectedinmarketforecasts.
Assteelpricessoftenmarginsmaybedepressedfurther.Januarysawasharpincrease
insteelprices,bothdomesticallyandinexportmarkets.Webelievethatpartofthe
increasewasduetorestockingandmaynotbesustainable.Therearealsosignsthatend
customersmaynotbereadytoacceptsubstantiallyhighersteelpriceswhenfacedwith
uncertaintyintheirownmarkets.Lackofrealdemandmayleadtoasteelprice
correctionin2011,depressingsteelmakersmarginsfurther.
Source:Bloomberga
Wemayseefurthervolatilityinsteelnamesasmarketexpectationsadjust.Current
marketforecastsforRussiansteelmakers2011financialsassumemarginimprovement
vs2010.Thismaybethecaseassteelpricesstrengthenovertheyear.However,ascost
pressuresbecomemoreapparent,wemayseeexpectationsreducedleadingto
downgradesinfairvaluecalculationsforsteelstocks.
WACCadjustedtoreflectlowercostofequity,forecastingperiodextendedto2016.As
aresultofa50bptsreductioninourcountryspecificequityriskpremiumourbasecost
ofequityhasbeencutto11.7%.CompanyspecificWACCshavebeenadjustedfurtherto
reflecttheirliquidity,debtloadandcurrentcostofdebt.
YtDstock,indexandsteelperformance
SBBHRCTra cker
SBBRebarTra cker
Baoste el
MechelADR
EvrazGDR
RTSIndex
SeverstalGDR
RemainbullishonRussiansteel,butfocusonnameswithshorttermvaluetriggers.
WeexpectRussiansteelperformancetobecloselycorrelatedwithsteelpricesand
companiesabilitytoprotecttheirmargins.Werecommendfocusingonnameswith
shorttermvaluetriggersasweexpectthemtooutperformtheirpeers.Severstal
(reiterateBUY)mayseeanimprovedperformanceintheUS,whileNLMK(upgradeto
BUY)couldbenefitfromacquiringtheremainingDufercoJVstake.MMKs(reiterate
BUY)performancecouldbedrivenbyagrowingshareofHVAproductsinitssalesmix.
Evraz(downgradetoHOLD)maynotseethefullbenefitofincreasedconstruction
activityinRussiauntil2012.
ArcelorMittal
BBGIron/Ste elCo
Index
MMKGDR
NLMKGDR
10%
0%
10%
20%
Source:Bloomberga
DINNURGALIKHANOV+7(495)2130338
Dinnur.Galikhanov@aton.ru
ILYAMAKAROV+7(495)7779090ext.2644
Ilya.Makarov@aton.ru
Note:Pricesasofclose15Feb2011throughoutthereport.Localsharedataisforinformationonlyandwas
calculatedusingeachcompanyscommonshare/GDRratioandprevailingUSD/RUBexchangerate
Forprofessionalinvestorsonly.Thisdocumenthasnotbeenpreparedinaccordancewithlegal
requirementsdesignedtopromotetheindependenceofinvestmentresearch.Pleaserefertoimportant
disclosuresandanalystcertificationattheendofthisdocument
Contents
InvestmentCase...........................................................................................3
CostsStarttoTakeCentreStage................................................................................. 3
WedonotyetSeeCostPressuresReflectedin2011MarketForecasts.................... 5
RussianSteelValuationsPremiumstoGlobalPeersStillJustified ................10
SummaryDataforSteelStocksunderCoverage ...........................................12
PriceForecastsUpgradedduetoStrongGainsinRecentMonths................15
CompanyPages ..........................................................................................19
EVRAZGROUP ............................................................................................21
ForecastChangesandValuation............................................................................... 21
FinancialAccounts..................................................................................................... 22
MAGNITOGORSKIRONANDSTEEL...............................................................24
ForecastChangesandValuation............................................................................... 25
FinancialAccounts..................................................................................................... 26
NOVOLIPETSKSTEEL ...................................................................................28
ForecastChangesandValuation............................................................................... 29
FinancialAccounts..................................................................................................... 30
SEVERSTAL .................................................................................................32
USBusinessmayHoldtheKeyto2010MarginExpansion....................................... 33
ForecastChangesandValuation............................................................................... 34
FinancialAccounts..................................................................................................... 35
Investment Case
Russiansteelstockshaveenjoyedastrongrunfollowingthecorrectionofmid2010.The
gainshavebeensupportedbyagradualrecoveryindemandandpricesandencouraging
Russianeconomicdata.However,weareincreasinglywaryofgrowingcostpressures
andthefragilestateofrealdemandwhichcouldmakeitdifficultforsteelmakersto
protecttheirmarginsin2011,letalonerecordgrowthatthelevelsachievedin2010.
AshighlightedinourJan2011issueofStratonomics,weremainfundamentallybullish
ontheRussiansteelsectorduetotheeconomicrecovery,appreciatingsteelpricesand
steelmakershighdegreeofverticalintegration.However,weareconcernedthatrecent
steelpriceincreases,drivenbycostinflationandseasonalrestocking,areunsustainable
inthemediumtermduetothelackofsupportfromrealdemand.Atthesametime,raw
materialcostpressures,exacerbatedbyrisingenergyandlabourcosts,continueto
depressmargins.
Russiassteelmakerscurrentsharepricesmaynotfullyreflectthechallengesthe
industryisstillfacing.Russiansteelstockshaveperformedstronglysincethe
publicationofourreportRoundupYourFlats,ShortWaitforLongs(25Oct2010),
gaininganaverageof35%beforeacorrectionattheendofJanuary.Whiletheoverall
gainsinsharepriceswerebroadlyinlinewithourexpectations(apartfromNLMKwhich,
despiteourHOLDrating,gainedaround45%,reachingapeakof$51.30/GDRon4Jan),
thepaceofsharepriceappreciationhassurpassedourexpectations.
Althoughsomeofthesharepricemovementcouldbeexplainedbytherapidgainsin
steelpricesattheendof2010andthebeginningof2011,aswellasencouragingdata
onRussiaseconomicdevelopment,wethinkthisexuberancemaybeunfoundedgiven
thattheindustrystillfacesanumberoftoughchallenges.
CostsStarttoTakeCentreStage
Rapidrawmaterialcostrisescamebackintofocusin2H10
Thefirsthalfof2010wasaperiodofcontinuedimprovementinmarginsforRussian
steelmakersasgrowingproductionvolumesandstrengtheningsteelpricesoffsetrising
rawmaterialcosts.Steelmakerswerealsoquitesuccessfulinkeepingnonrawmaterial
costsundertightcontrol,ascanbeseenfromFigures2and3,whichdepictcompanies
withahighdegreeofverticalintegrationEvrazandSeverstal.
Figure2:EvrazCashcostsandEBITDAmarginprogression
Figure3:Severstal*CashcostsandEBITDAmarginprogression
100%
80%
10.1%
36.2%
60%
40%
20%
100%
15.0%
18.1%
21.3%
25.8%
28.9%
24.1%
18.5%
19.1%
18.6%
19.2%
16.9%
36.0%
36.5%
35.2%
42.4%
2009
1Q10
2Q10
3Q10
80%
27.1%
34.6%
60%
16.6%
16.7%
15.6%
37.1%
34.7%
38.2%
1H09
2H09
1H10
40%
20%
24.6%
19.0%
14.0%
0%
0%
Mate ri al Cos ts
Energy+La bour
EBITDA
Ma teri a l Cos ts
Energy+La bour
Ca s hSG&Aandother
EBITDA
Meanwhile,Figures4and5showthemarginprogressionfortwocompanieswitha
lowerdegreeofverticalintegrationMMKandNLMK.
*Note:abovefiguresareforRussianSteelandSeverstalResources
Source:Companydata,Atonestimates
Figure4:MMKCashcostsandEBITDAmarginprogression
Figure5:NLMKCashcostsandEBITDAmarginprogression
100%
80%
60%
100%
25.3%
15.3%
15.6%
22.0%
21.1%
18.9%
17.0%
17.6%
15.4%
17.3%
13.7%
14.3%
80%
60%
40%
20%
40%
43.9%
43.7%
47.6%
2009
1Q10
2Q10
51.4%
20%
0%
29.1%
22.7%
35.9%
31.1%
22.4%
14.2%
17.9%
20.3%
16.1%
15.9%
27.4%
34.5%
33.7%
35.1%
4Q09
1Q10
2Q10
3Q10
26.8%
16.7%
0%
Mate ri al Cos ts
Energy+La bour
EBITDA
3Q10
Ma teri a l Cos ts
Energy+La bour
Ca s hSG&Aandother
EBITDA
Source:Companydata,Atonestimates
Inthesecondhalfof2010severalfactorstookaturnfortheworseforsteelcompanies,
notjustinRussia,butglobally:
Demandforsteelfaltered,leadingtosharppricecorrections
Steelcompanieswereforcedtocutoutputtobringitinlinewithdemand
Pressurefromrawmaterialcostscontinuedtoincrease
ThecombinationofthesefactorsledtomargindeteriorationforallRussiansteelmakers
in3Q10,ascanbeseeninFigures25.
WhileRussiansteelmakershavenotyetpublishedtheir4Q10financials,guidance
providedbycompaniesduringrecentannouncementsofoperatingresultshintsata
furthermargindeclineinthelastquarterof2010.
Forinstance,Evrazs4Q10operatingresultshighlightedacontinuousincreaseinraw
materialprices,exacerbatedbyrisinglabourandenergycosts.Consequently,despite
strongerthanexpectedoutputandpricerealisationsduringthequarter,its4Q10
EBITDAguidanceremainedunchangedfromtheprevioustradingupdate.NLMKhasalso
indicatedthatits4Q10EBITDAmarginshouldbearound25%,significantlydownfrom
the30%achievedin3Q10,partlyduetosteelpriceweaknessattheendoftheyear,but
mainlyasaresultofgrowingcosts,inourview.
Costinflationspreadstononrawmaterialcostsin2011
While2H10costincreasesweredrivenprimarilybyrawmaterials,in2011,weestimate
thatpricesforlabour,transportation,utilitiesandenergywillaccountforagrowing
portionofcashcosts.
AccordingtodatafromRussiasMinistryofEconomicDevelopment(MED),thecountrys
electricitytariffsforindustrialusersareestimatedtohaverisenby18%YoYin2010,
with1316%increasesexpectedin2011.Theincreaseinwholesalenaturalgaspricesin
2010wasevengreater,currentlyestimatedat26.7%YoY,while2011willlikelysee
pricesrisinganother15%andthisisjustfortheregulatedmarket.Finally,rail
transportationtariffsgained9.4%in2010andareexpectedtorise8%in2011(see
Figure6).
Figure6:Tariffsonnaturalmonopolies(%increaseYoY)
2008
Electricity:regulatedandunregulatedtariffsforallusers(excludinggeneralpublic)
22.4%*
Naturalgas:regulatedpricesforallusers(excludinggeneralpublic)
25.0%
Railfreighttransportation(annualaverages)
16.3%
*includesgeneralpublic
2009
20.0%
15.9%
12.4%
2010E
18.0%
26.7%
12.4%
2011E
1316%
15.0%
8.0%
2012E
1113%
15.0%
7.4%
Source:RussianMinistryofEconomicDevelopment
Inaddition,weanticipatesteelmakerslabourcostsrisingatleastinlinewithdomestic
inflation.AccordingtopreliminaryMEDestimates,inflationtotalled8.8%in2010andis
expectedtoreach78%in2011.However,giventhatRussiansteelcompanieskept
labourcostsundertightcontrolduringthecrisis,theactualincreasescouldbeeven
higher,inourview.
Forexample,accordingtotheRussianindustryjournalMetalSupplyandSales
(MetallosnabzhenieiSbyt),ZapSiboneofEvrazssteelproductionunitsinRussia
recentlyheldanemployeeconferencewhereacollectiveagreementfor201112was
finalised.Itwasagreedthataveragesalarieswouldincreaseby7%from1Mar2011and
byanother7%from1Oct2011anincreaseofover14%fortheyear.Weexpectother
Russiansteelmakerstoagreetosimilarlabourcostincreasesfor2011.
Roublestrengthmayaddtocostpressures
AshighlightedinourrecentreportTimetoStartAppreciatingtheRouble(21Dec2010),
theRussiancurrencyisstronglycorrelatedtotheoilprice.Basedonourmodels,an
averageoilpriceof$79/bblfor2011(AtonOilandGasteamestimate)wouldimplythe
rouble/$exchangeratestrengtheningtoRUB29/$byYE11,averagingaroundRUB30/$
fortheyear.Withoilnowtradingataround$100/bbl,ourforecastisbeginningtolook
conservative.
SincemostRussiansteelcompanycostsareroubledenominated,localcurrency
appreciationinflatescosts,althoughthisissomewhatoffsetbyastrengthenedrevenue
line.
ThedomesticcurrencystrengthenedtoRUB29.42/$in1Q10andthenweakenedto
RUB31.24/$in2Q,whichwebelievewaslikelyoneofthefactorsthatallowedRussian
steelmakerstodemonstratestrongerfinancialperformancevs1Q10.Thecurrencythen
appreciatedtoaroundRUB30.60/$in3Q4Q10,exacerbatingcostpressures.
WeDoNotYetSeeCostPressuresReflectedin2011MarketForecasts
Ascoststakecentrestagein2011,weseelittlereflectionofthemincurrentBloomberg
consensusforecastsfortheyear.Wehaveanalysedchangesto201011consensus
forecastsbetweenJuly2010,whentheoutlookforthesteelmarketandpriceswasstill
positive,andFeb2011,whenthefirstsignsof2H10margindeteriorationbecamevisible
andtheriskoffurtherdeteriorationin2011becameclear.
AscanbeseeninFigure7,BloombergconsensusEBITDAmarginforecastsfor2010saw
someminoradjustmentsastheyearprogressed.However,expectationsfor2011
marginssawlittledownwardrevisionbetweenJuly2010andFeb2011.Infact,in
Severstalscasetheforecastfor2011actuallyimproved(althoughthiscouldbe
explainedbyexpectationsofmarginimprovementsinthecompanysUSbusiness,which
maybejustifiedgiventhecurrentstrongrecoveryintheUSsteelmarket).
Figure7:EBITDAmarginforecastprogression(July10Feb11)
2010
Evrazf'cast
2010
MMKf'cast
2011
NLMKf'cast
2010
2011
1.65
1.79
Feb'11
0.67
Feb'11
2010
Jul'10
0.98
3.53
Feb'11
2011
Jul'10
3.35
2.16
Feb'11
2010
Jul'10
2.35
Jul'10
3.03
2.91
Jul'10
1.01
Feb'11
Jul'10
Feb'11
2011
Feb'11
2.68
1.86
3.25
Jul'10
20.2%
Feb'11
1.48
2010
2011
SVSTf'cast
0.03
19.1%
Jul'10
Jul'10
18.5%
Feb'11
2010
3.5
2.5
1.5
0.5
0.5
Feb'11
17.1%
32.0%
Feb'11
2010
Consensus2011EPSforecastssawlittlerevisioninthelastsixmonths
Jul'10
32.1%
29.1%
Feb'11
Jul'10
29.2%
Feb'11
2011
Jul'10
22.5%
22.1%
20.0%
Jul'10
Feb'11
2011
Jul'10
22.5%
20.9%
Feb'11
23.3%
Jul'10
20.3%
Jul'10
Feb'11
40%
35%
30%
25%
20%
15%
16.2%
Mostconsensus2011EBITDAmarginforecastshavehardly
changeddespitesharpdeteriorationofmarginsin2H10
Figure8:EPSforecastprogression(July10Feb11)
2011
Source:Bloombergconsensus
WeseeasimilarpictureinconsensusEPSforecastsfor201011:while2010EPS
estimateshavebeenreviseddownwardconsiderably(exceptforNLMK),themarkets
2011EPSexpectationshaveremainedbroadlyunchangedandinsomecases(NLMK,
Severstal)haveactuallyimproved(seeFigure8).
Webelievethelackofdownwardrevisionto2011forecastsfromJuly2010toFeb2011
canbeexplainedbythefollowingfactors:
Anexpectationofhighersteeloutputvolumesin2011whichwouldtranslateinto
improvedtoplineperformance
Anassumptionthatsteelmakerswouldbeabletoprotectorevenimprovetheir
marginsbypassingmost,ifnotall,cashcostincreasesontotheircustomers
throughhighersteelprices
Thecombinationofthesetwofactorswouldintheoryhaveallowedsteelmakersto
protecttheirmarginswhileimprovingbottomline.
Lackofrealdemandmayhampersteelmakersfrompassingcostsontocustomers
Whilethetwofactorsnotedabovetoplineimprovementsandsuccessinpassingcosts
ontocustomerscouldinfactmaterialisein2011,webelieveswiftresultsareunlikely
andnoteseveralriskfactorsthatmaydelaythefullpositiveeffectfrombeingfeltin
2012.
Firstly,steelpriceappreciationattheendof2010andthebeginning2011shouldnotbe
confusedwithasustainedpricerecovery,whichisverymuchdependantonarecovery
inrealdemandforsteel.Rather,webelievethisisagaintheresultofrestocking,which
mayhavebeencausedbyexpectationsofhighersteelpricesin1Q2Q10drivenbyrising
rawmaterialcosts.Thisisperhapssimilartothesteelpricerallyseenatthebeginningof
2010.
Secondly,forpriceincreasestobesustainable,realdemandneedstorecovertolevels
sufficienttoabsorbtheincreasedvolumeofsteelsuppliedtothemarket.AstheRussian
economycontinuestorecover,soshouldrealdemand.Atthemomentthesignsare
encouraging:ascanbeseenfromFigure9,bothindustrialproductionandfixed
investmentarefirmlyinpositivegrowthterritory.However,growthrateshavestabilised
atlevelsthatarestillbelowthepeaksreachedatthebeginningof2008.
Figure9:FixedinvestmentandIPgrowthinpositiveterritory
Industrialproduction
30%
Figure10:RussianGDPtogrowbyaround6%in201112
Fixedinvestment
10%
8%
6%
4%
2%
0%
2%
4%
6%
8%
10%
Industrialproductionandfixed
investmentgrowthrateshave
stabilisedatstronglevels
20%
10%
0%
10%
20%
30%
Jan08
Jul08
Jan09
Jul09
Jan10
Jul10
Source:Rosstat
7.1%
6.4%
7.4%
8.1%
5.9% 5.50%
5.6%
4.0%
7.9%
2004
2005 2006
Source:Rosstat,Atonestimates
Moreover,theAtonStrategyandEconomicsteamforecastthattherateofeconomic
growthin2011willnotexceed6%.Althoughthiswouldbeanimprovementon2010,it
isstillfarbelowtheratesachievedbyRussiaintherunupto2008(Figure10).Inthis
macroeconomicsettingwedoubtthatrealdemandforsteelcouldreturnto200708
levelsthisyear.
Infact,thecurrentdisputebetweenRussiansteelcompaniesandautomakers
demonstratesthatnotallsteelconsumersarereadytoabsorbpriceincreaseswhen
uncertaintyontheirownmarketsisstillhigh.Thissuggests,inourview,thatitcouldbe
difficultforsteelmakerstopassonthefullextentofcostinflationtotheircustomers.
Automakersarenottheonlycustomerswhoarefeelingtheeffectofrisingsteelprices.
Russiantubemakers,workinginmuchbettermarketconditionsa$100/bbloilworld
arealsofeelingtheheat.TMKandChTPZrecentlyapproachedRussiasFederal
AntimonopolyService(FAS)askingthemtoinvestigatesharppriceincreasesbytheir
mainsuppliers,MMKandSeverstal.
Weshouldalsonotdiscountthegovernmentsdesiretokeepdomesticmarketpricesin
checkascontaininginflationcomesintofocusduringtherunuptoparliamentary
electionsin2011andpresidentialpollsin2012.Inthissituation,webelievethe
governmentcouldintroducemeasuresaimedatcontrollingdomesticpriceincreases.
Thegovernmenthasalreadybroachedtheideaofexporttariffsonrolledsteelandiron
oreasonepotentialmeasure.Wethinkthisapproachcouldleadtoashortterm
oversupplyofsteelonthedomesticmarketandaneventualcurtailmentofproduction
byRussiansteelmakers.
Finally,highersteelpricescouldenticesteelmakerstoincreaseoutput,whichinthe
absenceofstrongrealdemandcouldleadtooversupply.Thiswouldputadditional
downwardpressureonsteelprices,likelyleadingtoasharpcorrectionsimilartowhat
wasseenin2010.However,thistimearound,wethinkstrongerexportmarketscould
helpoffsetsomeofthepotentialweaknessathome.Nevertheless,thiscouldalsobe
shortlivedasindustrynewswires(MetalBulletin,SteelBusinessBriefing)arealready
reportingsofteningsteelpricesinseveralkeyexportmarkets.Inanycase,theexport
offeringsofRussiansteelmakersarelimitedprimarilytolowvalueaddedproducts.
Mostofthesefactors,inoneformoranother,wereinplayin2010,whenprices
increasedinthefirstthreetofourmonthsoftheyearoverexpectationsofhigherraw
materialcosts,leadingtopanicrestocking.Thiswasfollowedbyasharpprice
correctionduringthesummermonthsandonlyaslightrecoveryinsteelpricescloserto
theendoftheyear.
Steelsharescouldseearepeatof2010pricevolatility
Jan11
Nov10
Oct10
Sep10
Jul10
Jun10
Apr10
Mar10
Feb10
Dec09
Nov09
Jan11
Nov10
Oct10
Sep10
Jul10
80
Jun10
100
80
Apr10
100
Mar10
120
Feb10
140
120
Dec09
160
140
Nov09
180
160
Oct09
180
Oct09
GivenhowcloselycorrelatedRussiansteelstocksaretosteelprices,wecouldseea
repeatofthe2010correctionin2011,inourview.Figures11and12showthatRussian
steelcompanysharepricesmovedinanticipationofchangesinsteelprices,gaining
throughthelatterpartof2009andthebeginningof2010andthenreversingdirection
evenbeforethefullextentofthesteelpricecorrectionwasapparent.
Figure11:MMKandNLMKshareperformancevsflatsteelprices Figure12:Evrazshareperformancevslongsteelprices
Source:Bloomberg
Althoughreportsfromsteelcompaniessuggestthatstrongrisesinsteelpricesshouldbe
expectedin1Q11,sharepricesstartedtocorrectwhensteelpricessoftenedafter
supportfromtherestockingdrivebegantodiminish.Giventhatasteelpricecorrection
couldbecomearealityasearlyas1Q11,wewouldnotruleoutthepossibilityoffurther
volatilityinRussiansteelstocksinthecomingquarters.
Notallisdoomandgloom
Whilesteelandcommoditypricesshouldcontinuetobethemaindriverofshareprice
performanceforRussiansteelmakers,webelievethatshareswithadditionalvalue
catalystsshouldoutperformtheirpeersin2011.Belowaresomeofthedriversthatmay
supportRussiansteelsharesin2011:
Severstal:
ArecoveryintheUSsteelmarketleadingtoupsidesurprises.WethinkSeverstal
UScouldrepeatitspositive2Q10performanceonthebackofstrongerUSprices
andgrowingcapacityutilisation.AswingtopositiveEBITDAin2Q10cameona15%
QoQincreaseinsalesvolumesandan8%QoQincreaseinaveragerealisedprices.
NordgoldIPOmaysoonbebackonthecards.Althoughthemarketsreceptionof
theIPOwaslukewarm,webelievethatavaluationintherangeof$3.54bnisstill
realisticandcouldoffer1015%upsidepotentialtothecurrentshareprice.
MMK:
RisingshareofHVAgoodscouldhelpoffsetcostpressures.ThecompanysMill
5000isnowoperatingatfullcapacity(1.5mntpa)withitsorderbookfullatleastto
theendof1H11.
NLMK:
AcquisitionoftheremainingstakeinJVwithDuferco.NLMKisshortofinhouse
rollingcapacityandusestheJVasanoutletforitsexcessslabproduction.The
acquisitionwouldallowittorecordhighersalesmarginswithinthegroup.
Evraz:
RecoveryinconstructionactivityinRussiaandUkraine.Evrazcouldbeastockto
watchin2011giventheexpectedrecoveryinRussiasconstructionindustry.
However,weviewexpectationsofanystrongsharepricehikesaspremature,given
thatthefullextentofincreasedconstructionactivitywouldprobablynotbefelt
untilwellinto2012.Werecommendwaitinguntilearly2Q11toreassessthe
progressofRussiasconstructionindustrybeforeincreasingpositionsinthestock.
Ourvaluationmethodusesacombinedmultiplesbasedapproach(P/EandEV/EBITDA)
andDCF.Thetwomultipleseachaccountfor25%oftheweightedaveragevaluation,
withtheDCFvaluationprovidingtheremaining50%.Themultiplesvaluationallowsus
toaccountforacompanysshorttomediumtermfinancialperformanceanddebtload,
whiletheDCFcalculationaimstoreflectthegrowthpotentialofeachstockandhence
hasahigherweightinginourvaluations.
Oneminoradjustmentfromourpreviouscalculationsisachangetothebasecostof
equityduetotherecentrevisionofourcountryspecificriskpremium,whichwas
reducedfrom3.7%to3.2%.Asaresult,thebasecostofequitydeclinedfrom12.2%to
11.7%.TheWACCforeachindividualcompanyalsotakesintoaccountitsliquidityand
debtposition.
Russiansteelspremiumtoglobalpeersisstilljustified,inourview
Figures13and14arebasedonBloombergconsensusforecastsofthe2011EBITDA
marginsofRussiancompaniesandaselectionofinternationalpeersinbothdeveloped
andemergingmarketsatthetimeofourpreviousupdateon25Oct2010(Figure13)
andnow(Figure14).ThechartsshowthatthemarketstillexpectsRussiansteelmakers
tooutperformtheirpeersin2011.TheaverageEBITDAmarginforecastforfiveRussian
steelmajorsin2011isapproximately25%vstheemergingmarketaverageof16%and
thedevelopedmarketaverageof11%(seeFigure14).
Figure13:Consensus2011EEBITDAmargins(25Octupdate)
Figure14:Consensus2011EEBITDAmargins(currentupdate)
32.2%
35%
26.9%
12.7%
15%
0%
Avg.Int.
Emerging
Markets
Avg.Int.
Developed
Markets
0%
Severstal
5%
Evraz
5%
MMK
10%
Mechel
22.4%
20.7%
16.4%
15%
10%
NLMK
22.3%
20%
16.3%
10.0%
Avg.Int.
Emerging
Markets
Avg.Int.
Developed
Markets
19.4%
Severstal
20%
25.9%
25%
Evraz
20.9%
MMK
21.1%
25%
31.9%
30%
Mechel
30%
NLMK
35%
Source:Bloomberg
Evenifweassumethe2011estimatesforRussiansteelmakersareoverlyoptimisticand
theywilleventuallybereviseddownward,wethinktherewillstillbeenoughofalead
overinternationalpeerstojustifythepremiumsatwhichRussiansteelmakerscurrently
trade.
OurapproachtovaluingRussiansteelsreflectsourexpectationsofsustained
profitabilityleadershipoverinternationalpeers
Globalsteelmakersarecurrentlytradingat2011P/Esrangingfrom9xto16xfor
emergingmarketpeersand1218xforsteelmakersindevelopedmarkets.Therangefor
EV/EBITDAis511xforemergingmarketsand58xfordevelopedmarkets(foramore
detailedbreakdown,seeFigure15).
1
0
Figure15:Comparativemultiplesofpeersbasedonestimatesfor201112E
MktCap
($mn)
Country
EV/EBITDA
2011E
Developedmarkets
ArcelorMittal
Luxembourg
57,986
7.1
ThyssenKrupp
Germany
21,132
4.5
Voestalpine
Austria
7,555
6.9
NucorCorp
USA
15,262
8.0
USSteel
USA
8,949
6.5
AKSteel
USA
1,815
5.3
NipponSteel
Japan
24,877
6.8
JFEHoldings
Japan
20,070
6.6
BluescopeSteel
Australia
4,145
8.5
Median,DMpeers
6.8
Emergingmarkets
POSCO
SouthKorea
37,468
5.3
HyundaiSteel
SouthKorea
10,410
7.3
ChinaSteelCorp
Taiwan
15,460
11.1
BaoshanIron&Steel
China
19,082
4.8
WuhanIron&Steel
China
5,389
5.8
MaanshanIron&Steel
China
4,330
5.1
AngangSteel
China
9,108
6.4
TataSteel
India
12,993
6.7
Gerdau
Brazil
19,242
6.6
Usiminas
Brazil
14,300
8.8
Median,EMpeers
6.5
Russia
EvrazGroup
Russia
16,731
7.2
MagnitogorskSteel
Russia
11,879
7.4
Mechel
Russia
13,154
6.2
NovolipetskSteel
Russia
26,071
8.5
Severstal
Russia
17,836
6.4
Median,Russianpeers
7.2
Russiansteelproducerspremium/discounttointernationalpeers:
EvrazGroup
8%
MagnitogorskSteel
11%
Mechel
7%
NovolipetskSteel
27%
Severstal
4%
2012E
5.8
3.6
6.1
6.1
5.2
4.1
6.3
6.0
5.6
5.8
4.9
6.9
9.9
4.3
5.2
4.7
5.7
6.1
5.3
6.3
5.5
5.9
5.4
5.5
6.2
5.4
5.5
5%
5%
2%
10%
4%
P/E
2011E
13.1
15.7
12.0
18.9
15.9
17.5
17.3
17.6
53.7
17.3
9.4
9.6
13.3
8.7
12.9
13.1
13.5
9.2
11.5
17.4
12.2
16.7
14.6
8.6
13.4
11.1
13.4
13%
1%
42%
9%
25%
2012E
9.2
9.9
9.6
13.0
11.0
11.1
12.9
11.9
14.6
11.1
8.7
8.8
10.9
7.5
9.6
11.9
10.4
8.1
9.3
11.9
9.4
10.6
8.9
8.4
9.5
8.8
8.9
4%
14%
18%
8%
14%
EBITDA
margin(%)
Netmargin
(%)
2011E
12%
8%
14%
11%
8%
6%
12%
14%
6%
11%
21%
16%
17%
16%
14%
12%
14%
14%
18%
20%
16%
22%
21%
26%
30%
19%
22%
2011E
5%
2%
4%
4%
3%
2%
3%
3%
1%
3%
12%
9%
13%
6%
3%
3%
4%
6%
8%
9%
7%
7%
8%
13%
18%
9%
9%
Source:Bloomberg,Atonestimates
WestillbelievethatRussiansteelmakersshouldbevaluedatapremiumtointernational
peers,giventheirsuperiorfinancialperformancetodateandmarketandour
expectationsthattheywillsustainthisleadershipintheshorttomediumterm.
Nevertheless,weremainconservativeandusemultiplesof14xP/Eand7xEV/EBITDAin
ourcalculations(exceptforNLMK,whichwevalueusingaP/Eof16xandanEV/EBITDA
of8xtoreflectitsprofitabilityleadership,mediumtermgrowthprospectsandthe
uniquemixofhighvalueproductsinitssalesportfolio).
However,wearemoreconservativethantheconsensusinour2011forecasts
AsFigure22demonstrates,wearemoreconservativethantheBloombergconsensusin
our2011forecastsforRussiansteelmakers.Thisisintendedtoreflectthepressures
steelcompaniescouldfacethisyear.However,wealsobelievethatasmarketsrecover
in2012,steelcompaniesshouldbewellplacedtotakeadvantageofrisingdemandand
prices.
Therefore,wehaveusedtheaverageofour201112EEBITDAandnetincomeforecasts
asthebasisforourmultiplesvaluations.
1
1
ThissectionprovidessummaryinformationforstocksunderAtoncoverage.
InFigure16wesummarisethechangestoourtargetpricesandratings.
Figure16:Ratingsummary
Company
EvrazGroup(GDR)
MMK(GDR)
MMK(Local)
NLMK(GDR)
NLMK(Local)
Severstal(GDR)
Severstal(Local)
Ticker
Target
price
(old)
Target
price
(new)
Target
price
change
Current
price
Upside
potential
Rating
(old)
Rating
(new)
EVRLI
MMKLI
MAGNRM
NLMKLI
NLKMRM
SVSTLI
CHMFRM
($/share)
35.33
15.33
1.18
35.55
3.56
18.57
18.57
($/share)
42.30
16.20
1.25
49.40
4.94
22.10
22.10
(%)
19.7%
5.7%
6.0%
39.0%
39.0%
19.0%
19.0%
($/share)
38.21
13.82
1.07
43.50
4.35
17.70
17.62
(%)
10.7%
17.2%
16.6%
13.6%
13.5%
24.9%
25.4%
BUY
BUY
BUY
HOLD
HOLD
BUY
BUY
HOLD
BUY
BUY
BUY
BUY
BUY
BUY
Source:Bloomberg,Atonestimates
Figure17reflectsthechangesinourtargetpricesifwealteranyofthekeyvaluation
criteriaforthestocksundercoverage.
Figure17:Valuationrangesforthestocks
Company
EvrazGroup(GDR)
MMK(GDR)
NLMK(GDR)
Severstal(GDR)
Current
share
price
Target
price
($/share)
($/share)
Base
+1%
Base
WACC
Base
1%
12x
14x
16x
6x
7x
8x
38.21
13.82
43.50
17.70
42.30
16.20
49.40
22.10
35.15
13.00
50.73
17.86
42.83
15.44
59.24
20.69
53.36
18.69
70.92
24.32
35.30
15.11
32.84
21.62
41.18
17.63
38.32
25.22
47.07
20.15
43.79
28.83
33.77
13.26
26.01
18.13
42.27
16.12
30.70
21.91
50.77
18.99
35.38
25.70
201112E
averageP/E
DCFWACCRate
201112E
averageEV/EBITDA
Source:Bloomberg,Atonestimates
Thefollowingtablesprovidesomeusefulperformanceandfinancialdataforthestocks.
Figure18:Stockperformancedata
1M
3M
YtD
1Y
52weekhigh($)
52weeklow($)
Combineddailyt/o($mn)
Freefloat(%)
Freefloat($mn)
EvrazGroup
3.2%
27.4%
6.5%
15.1%
42.72
21.80
47.1
17.4%
2,911
MMK
11.0%
8.0%
5.0%
8.1%
16.23
8.90
8.2
13.4%
1,592
NLMK
7.6%
15.8%
8.8%
42.2%
51.00
25.04
19.9
12.9%
3,363
Severstal
7.0%
27.0%
5.0%
42.9%
19.78
9.35
46.9
17.6%
3,139
Source:Companydata,Bloomberg,Atonestimates
1
2
Figure19:Keyvaluationdata
Valuationsummary:
Targetprice($/GDR)
Currentprice($/GDR)
Potentialupside/downside(%)
Rating(GDR)
Targetpricelocal($/share)
Currentpricelocal($/share)
Potentialupside/downside(%)
Rating(local)
Keyvaluationmetrics:
Commonsharesinissue(mn)
CommonshareGDRequivalent(mn)
Marketcap($mn)
Netdebt($mn)
EV($mn)
BV($mn)
Keyvaluationratios:
P/Eratios(x)
2009
2010E
2011E
2012E
EV/EBITDAratios(x)
2009
2010E
2011E
2012E
P/BVratio(x)
EvrazGroup
42.30
38.21
10.7%
HOLD
n/a
n/a
n/a
n/a
146
438
16,731
7,219
24,269
10,312
n/a
n/a
16.7
10.6
MMK
16.20
13.82
17.2%
BUY
1.25
1.07
16.6%
BUY
11,174
860
11,879
2,928
15,228
10,128
51.1
49.5
14.6
8.9
NLMK
49.40
43.50
13.6%
BUY
4.94
4.35
13.5%
BUY
5,993
599
26,071
1,148
27,333
9,556
97.7
17.4
10.4
9.2
Severstal
22.10
17.70
24.9%
BUY
22.10
17.62
25.4%
BUY
1,008
1,008
17,836
4,331
22,448
7,718
n/a
n/a
11.1
8.8
19.6
14.9
15.8
26.5
10.2
10.6
9.2
8.0
7.2
7.4
6.9
6.4
5.9
5.4
6.0
5.4
1.6
1.2
2.7
2.0
Source:Companydata,Bloomberg,Atonestimates
Figure20:Keyfinancials
Revenue($mn)
2009
2010E
2011E
2012E
AdjustedEBITDA($mn)
2009
2010E
2011E
2012E
EBITDAmargin(%)
2009
2010E
2011E
2012E
Netincome($mn)
2009
2010E
2011E
2012E
Netmargin(%)
2009
2010E
2011E
2012E
EvrazGroup
9,772
12,382
15,365
16,835
1,237
2,368
3,361
4,081
12.7%
19.1%
21.9%
24.2%
1,251
54
1,002
1,574
12.8%
0.4%
6.5%
9.4%
MMK
5,081
7,597
10,038
12,091
1,023
1,437
2,059
2,837
20.1%
18.9%
20.5%
23.5%
232
240
812
1,342
4.6%
3.2%
8.1%
11.1%
NLMK
6,140
8,382
10,905
13,524
1,370
2,384
3,233
4,397
22.3%
28.4%
29.6%
32.5%
215
1,332
1,949
2,753
3.5%
15.9%
17.9%
20.4%
Severstal
13,054
15,021
18,767
20,823
846
2,804
3,508
4,121
6.5%
18.7%
18.7%
19.8%
1,037
87
1,603
2,029
7.9%
0.6%
8.5%
9.7%
Source:Companydata,Atonestimates
1
3
Figure21summariseschangesmadetoourkeyestimates(EBITDAandnetincome)
sinceourpreviousupdate.
Figure21:Atonestimatesoldvsnew
EBITDA
Netincome
Company
2010E
2011E
2012E
3Y
average
2010E
2011E
2012E
3Y
average
EvrazGroup:
Newestimate($mn)
Oldestimate($mn)
Changevsold(%)
MMK:
Newestimate($mn)
Oldestimate($mn)
Changevsold(%)
NLMK:
Newestimate($mn)
Oldestimate($mn)
Changevsold(%)
SVST*:
Newestimate($mn)
Oldestimates($mn)
Changevsold(%)
2,368
2,373
0.2%
1,437
1,535
6.3%
2,384
2,424
1.6%
2,804
3,315
15.4%
3,361
3,431
2.0%
2,059
2,423
15.0%
3,233
3,263
0.9%
3,508
3,961
11.4%
4,081
4,040
1.0%
2,837
2,737
3.7%
4,397
3,700
18.8%
3,508
4,155
15.6%
0.4%
5.9%
5.4%
14.2%
54
112
n/a
240
270
11.2%
1,332
1,208
10.3%
87
9
n/a
1,002
826
21.3%
812
872
6.8%
1,949
2,011
3.1%
1,603
1,598
0.3%
1,574
1,297
21.4%
1,342
1,058
26.8%
2,753
2,293
20.1%
2,029
1,802
12.6%
21.3%
2.9%
9.1%
6.4%
*PreviousSeverstalforecastsincludedLucchini
Source:Atonestimates
Finally,Figure22comparesourestimatesforsteelstockswiththecurrentBloomberg
consensusview.Wearemoreconservativethanconsensusinour2011forecasts.
Meanwhile,ourexpectationsfor2012areeitherinlinewithoraheadofconsensus,as
webelievethebenefitofincreaseddemandandhighersteelpriceswillnotbefullyfelt
in2011,butshouldbepushedbackto2012.
Figure22:AtonestimatesvsBloombergconsensus
EBITDA
Netincome
Company
2010E
2011E
2012E
3Y
average
2010E
2011E
2012E
3Y
Average
EvrazGroup:
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
MMK:
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
NLMK:
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
SVST:
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
2,368
2,384
0.7%
1,437
1,557
7.7%
2,384
2,400
0.7%
2,804
2,930
4.3%
3,361
3,553
5.4%
2,059
2,414
14.7%
3,233
3,370
4.1%
3,508
3,831
8.4%
4,081
4,068
0.3%
2,837
2,799
1.4%
4,397
3,959
11.1%
3,508
4,016
12.6%
1.9%
7.0%
2.1%
8.5%
54
103
n/a
240
380
36.8%
1,332
1,311
1.6%
87
1,002
n/a
1,002
1,208
17.1%
812
1,047
22.4%
1,949
2,047
4.8%
1,603
1,818
11.8%
1,574
1,442
9.2%
1,342
1,360
1.3%
2,753
2,373
16.1%
2,029
1,970
3.0%
3.9%
20.2%
4.3%
4.4%
Source:Bloomberg,Atonestimates
1
4
Highrawmaterialprices,inparticularforcokingcoalandsteelscrap,willlikelycontinue
toputpressureonRussiansteelproducersmargins,asitwillbedifficultforthemto
passonthefullextentofcostincreasestocustomerswhilethedemandpictureremains
uncertain.
HRCprices:weexpectasofteningin2H11
HRCpricesexperiencedexceptionalgainsatthebeginningof2011,whichweexpectto
continueintheseasonallystronger2Q11:weestimateaveragepriceswillrangefrom
$700/tto$800/tinthefirsthalfoftheyear.However,weexpectpricestosoftenin
2H11,withafullyearaverageof$740/tforthedomesticmarketand$760/tforexports
(seeFigure23).
Figure23:HRCpricesstrongin1H11,softeningin2H11($/t)
Figure24:CISHRCuparound13%vsourpreviousforecast($/t)
HRCCISproduce rpri ce NEW
HRCCISproduce rpri ce OLD
HRCCISexportpri ce
900
588
663
666
650
604
516
601
3Q10
2Q10
500
400
731
4Q11E
600
4Q11E
3Q11E
2Q11E
1Q11E
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
300
4Q10
400
642
700
Weassumeprice
softeningin2H11,similar
to2H10correction
1Q10
500
742
695
4Q10
600
200
781
800
3Q11E
700
2Q11E
Exportpricesstarttrading
atapremiumtodomestic
800
631
1Q11E
HRCCISproduce rpri ce
Source(Figures32and33):MetalExpert,Bloomberg,Atonestimates
OurnewdomesticHRCpriceestimatesfor2011areanaverageof13%higherthanour
previousforecast(seeFigure24).
Rebar:strongrecoveryatend2010andstartof2011
Rebarpricesenjoyedastrongerrecoverythanweexpectedin4Q10,averagingaround
$590/tvs$550/tinourOctoberforecast.Wehaverevisedourestimatestotakeinto
accountthepricestrengthseeninJanuaryandFebruary.Onceagain,weexpect3Q
4Q11tobeseasonallyweak,bringingtheaveragepricefor2011toaround$700730/t,
withdomesticpricesexpectedtoreachapremiumtoexport(seeFigure25).
1
5
Figure25:Rebarstrongerrecoveryin4Q10vsforecast($/t)
Domesticpricesimproveas
constructionactivitypicksup
900
800
600
618
751
732
621
605
599
663
589
579
600
474
4Q10
3Q10
2Q10
400
550
577
1Q11E
500
4Q11E
3Q11E
2Q11E
1Q11E
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
300
4Q10
400
200
700
Weassumeprice
softeningin2H11,similar
to2H10correction
1Q10
500
762
4Q11E
700
3Q11E
800
Re ba rCISe xportpri ce
2Q11E
Re ba rCISproducerpri ce
Figure26:Rebarpriceestimateup20%vsearlierforecast($/t)
Sources:MetalExpert,Bloomberg,Atonestimates
Ournewpriceassumptionsforrebarare2021%higherthanourOctoberestimates(see
Figure26).
Flatsteelmaintainsanarrowingpremiumoverlongproducts
Longsteelpriceshaveundergoneastrongrecovery,narrowingthediscounttoflatsteel
toaround3%in4Q10.AlthoughweexpectHRCtocontinuetradingatapremiumto
rebargoingforward,wethinkthepremiumwillbelower:around5%in2011vs10%in
ourpreviousforecast(Figure27).
Figure27:Longssteeldiscounttoflatexpectedtonarrow($/t)
CISDomes ti cFl atStee l Bas ke t
CISDomes ti cLongStee l Bas ke t
900
Flatsteelisstill
expectedtotradeat
apremiumtolong...
800
700
4Q11E
3Q11E
2Q11E
1Q11E
3Q10
1Q10
4Q09
3Q09
2Q09
4Q10E
1Q09
500
2Q10
butthediscountisexpectedtonarrow
asconstructionactivitypicksup
600
Source:MetalExpert,Bloomberg,Atonestimates
Pressurefromhighrawmaterialpricessettorolloverinto2011
Weexpecthighrawmaterialpricestocontinuepressuringsteelmakersmargins.This
shouldbeespeciallypronouncedincokingcoalin2011(duetotheRaspadskaya
accidentlastyearandastructuralshortageofhighquality,locallyproducedcoking
coal).Amajorincreaseinscrappricescanbeexpectedfrom2012onthebackof
insufficientscrapgenerationandaddeddemandfromnewelectricarcfurnace(EAF)
capacity.
Wethinktheincreaseinironorepriceswillbelesspronouncedvscokingcoalsince
Russiaisnotcurrentlyexperiencinganyshortageofthismaterial(seeFigure28).
1
6
Figure28:StrongincreaseincokingcoalpriceduetoRussiandeficit($/t)
Coki ngcoa l (Rus s i adome s ti cGZhtype)
Ironoreconcentrate(Rus s i adomes ti c)
250
4Q11E
3Q11E
2Q11E
1Q11E
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
Shortageofdomesticoutput
200 supportscokingcoalprices
158 166 168 164
134
125 124
150
92 103
100 51 49 58
88 81 82 92 94 95 94
50
62
36 48
0 33 32
Source:MetalExpert,Bloomberg,Atonestimates
Raspadskayarecentlyannouncedan11%increasein1Q11pricesforcokingcoal.
However,weexpectthisupwardmomentumtoslowfrom2Q11,asRaspadskayastarts
torecovertheoutputlostfollowinglastyearsaccident.Weexpect1Q113Q11pricesto
averagearound$160165,softeningin4Q11(seeFigure29).Weestimateanaverage
2011cokingcoalpriceofaround$165/t,35%higherthanin2010.
Figure29:Cokingcoalpricessupportedbycontinueddeficit($/t) Figure30:Ironorepricestrengtheningonhigherdemand($/t)
Coki ngcoa l (Rus s i a dome s ti cGZhtype)NEW
Coki ngcoa l (Rus s i a dome s ti cGZhtype)OLD
124
103
146
157
88
100
153
151
135
75
81
62
92
94
95
94
82
80
84
86
85
4Q11E
125
125
125
164
3Q11E
150
134
168
2Q11E
175
166
1Q11E
158
4Q10
200
82
3Q10
2Q10
50
1Q10
4Q11E
3Q11E
2Q11E
1Q11E
4Q10
3Q10
2Q10
75
1Q10
100
Sources(Figures29and30):MetalExpert,Bloomberg,Atonestimates
Weexpectironoreconcentratepricestoincreasemodestlyovertheyear,averaging
$95/t,up20%YoY(seeFigure30).
Forsteelscrap,weforecastapriceincreaseofapproximately15%YoYin2011toaround
$270/t.Thisis16%higherthanourearlierforecast,mainlyduetoincreasedlongsteel
pricesandthereforeelevateddemandforscrap.
Ourpriceassumptionsforthemainsteelproductsandrawmaterialsaresummarisedin
Figures3132.
1
7
Figure31:AtonrawmaterialandsteelpriceassumptionsFeb2011($/metrictonne)
Rawmaterialprices,FCA,exVAT:
Ironoreconcentrate
Cokingcoalconcentrate(GZhtype)
Steelscrap
Domesticprices,exworks,exVAT:
HRC
Rebar
Exportprices,FOB,exVAT:
Slab
Billet
HRC
Rebar
old
new
%chg
old
new
%chg
old
new
%chg
old
new
%chg
old
new
%chg
old
new
%chg
old
new
%chg
old
new
%chg
old
new
%chg
2010
79
79
0.5%
122
122
0.2%
230
233
1.5%
589
587
0.3%
555
565
1.8%
532
533
0.2%
517
532
3.0%
595
605
1.7%
548
563
2.6%
2011E
83
95
14.6%
152
164
8.1%
231
268
16.0%
653
737
13.0%
601
727
21.0%
561
669
19.4%
548
687
25.2%
626
764
22.1%
583
702
20.4%
Annualprices
2012E 2013E
88
85
101
101
15.7% 18.8%
157
156
181
179
15.1% 15.2%
257
272
314
345
22.1% 26.9%
667
655
825
803
23.6% 22.6%
632
633
844
838
33.6% 32.4%
574
563
755
731
31.6% 29.8%
576
578
817
823
41.7% 42.4%
640
628
866
843
35.2% 34.2%
613
614
811
805
32.3% 31.1%
2014E
80
97
21.0%
152
174
14.5%
272
349
28.5%
639
778
21.7%
618
812
31.2%
549
708
28.8%
564
797
41.2%
613
816
33.2%
600
780
29.9%
2015E
76
92
21.5%
150
168
12.2%
272
347
27.5%
630
757
20.3%
607
790
30.2%
541
689
27.3%
554
776
40.1%
604
795
31.6%
589
759
28.9%
3Q10
84
84
124
124
211
211
598
588
579
579
514
514
528
528
574
574
562
562
Quarterlyprices
1Q11E 2Q11E 3Q11E 4Q11E
80
84
85
84
93
96
96
96
16.2%
14.9% 13.7%
13.7%
146
157
153
151
158
166
168
164
8.1%
5.6%
9.9%
8.8%
218
234
237
234
249
267
281
274
14.1%
14.1% 18.7%
16.9%
631
663
666
650
695
781
742
731
10.0%
17.9% 11.4%
12.6%
577
621
605
599
663
762
751
732
14.8%
22.8% 24.0%
22.2%
543
570
573
558
599
674
708
697
10.4%
18.3% 23.6%
24.8%
527
567
552
547
635
698
716
698
20.4%
23.2% 29.6%
27.6%
605
636
639
623
710
799
779
767
17.3%
25.7% 21.9%
23.2%
560
602
587
581
651
732
721
703
16.2%
21.6% 22.8%
21.0%
Source:MetalExpert,Atonestimates
4Q10
83
84
2.0%
135
134
0.8%
207
221
6.5%
601
604
0.4%
550
589
7.1%
517
521
0.8%
502
564
12.4%
577
618
7.1%
534
592
10.9%
Figure32:Rawmaterialandsteelpriceassumptions(Feb2010)periodonperiodprogression(%)
Rawmaterialprices,FCA,exVAT:
Ironoreconcentrate
Cokingcoalconcentrate(GZhtype)
Steelscrap
Domesticprices,exworks,exVAT:
HRC
Rebar
Exportprices,FOB,exVAT:
Slab
Billet
HRC
Rebar
YoYchangeinprices
2011E 2012E 2013E
20%
6%
1%
35%
10%
1%
15%
17%
10%
26%
12%
3%
29%
16%
1%
26%
13%
3%
29%
19%
1%
26%
13%
3%
25%
16%
1%
2010
83%
95%
39%
35%
34%
43%
35%
33%
28%
1
8
2014E
4%
3%
1%
3%
3%
3%
3%
3%
3%
2015E
5%
3%
1%
3%
3%
3%
3%
3%
3%
3Q10
4%
1%
15%
8%
6%
14%
1%
12%
3%
4Q10
0%
8%
5%
3%
2%
1%
7%
8%
5%
QoQchangeinprices
1Q11E 2Q11E 3Q11E 4Q11E
10%
4%
1%
1%
18%
5%
1%
3%
13%
8%
5%
3%
15%
13%
5%
2%
13%
15%
2%
3%
15%
13%
5%
2%
13%
10%
2%
3%
15%
13%
3%
2%
10%
13%
2%
2%
Source:MetalExpert,Atonestimates
Companies
1
9
EVRAZ
GROUP
Hold on a Little Bit Longer
WeincreaseourtargetpriceforEvrazto$42.30/GDR(up20%from$35.33/GDR
previously)onstrongersteelpricesandencouragingsignsfromtheRussian
constructionsector.However,wedowngradeourratingtoHOLDaswethinkthe
shareshaverunslightlyaheadoffundamentals:whilearecoveryinconstruction
seemstobeunderway,weneedmoreevidencetobesureitissustainable.
Figure33:Evrazssteelsalescontinuetoberelativelyflat(000tonnes)
HOLD
Target price
$42.30
5,000
11%
3,000
Potential upside
Steelsalesvolumesremained
relativelyflatoverlastsixquarters
4,000
2,000
Sharedata
No.ofordinaryshares(mn)
No.ofordinaryGDRs(mn)
No.ofprefshares(mn)
3Maveragedailyt/o($mn)
Freefloat(%)
Marketcapitalisation($mn)
Enterprisevalue($mn)
Majorshareholders
LanebrookLimited
FINANCIALS($mn) 2009
Revenue
9,772
EBITDA
1,237
EBIT
(1,047)
Netincome
(1,251)
EPS
(9.30)
VALUATION
P/E(x)
P/CF(x)
EV/EBITDA(x)
EV/Sales(x)
P/BV(x)
RoCE(%)
RoE(%)
PERFORMANCE
(13.4)
15.8
19.6
2.5
1.6
6.9%
12.2%
4Q10
3Q10
2Q10
1Q10
Source:CompanyData
Operatingresultsfor2010broadlyinlinewithexpectations.Outputin4Q10recovered
acrossmostproductgroupsafterplannedmaintenancein3Q10.Asaresult,2010crude
steelproductionincreased6.6%YoYto16.3mnt.Rolledproductsalesgained3%YoYto
14.7mnt.Encouragingly,salesofconstructionsteelcontinuedtoshowpositiveQoQ
dynamics,whichwehopereflectsagradualrecoveryintheRussianconstruction
industry.Inmining,Evrazproduced19.4mntofironoreproducts(up9%YoY)andmined
7.5mntofcokingcoal(down27%YoYduetooperationalissues).
ButconservativeEBITDAguidanceconfirmsourcostconcerns.Despiteencouraging
72.39%
operatingdata,Evrazmaintainedits4Q10EBITDAguidanceataround$595mn(inline
with3Q10)highlightinggrowingcostpressuresfromrawmaterials,energyandwages
10E
11E
12,382 15,365 thateffectivelycancelledoutgainsinoutputandprices.
2,368
3,361
514
1,795 Verticalintegrationshouldprovidesomemarginprotection.Evrazenjoysahighdegree
(54)
1,002 ofintegrationinironore(closeto90%in2010)andcokingcoal,whereselfsufficiencyis
(0.37)
6.87 expectedtoincreasefrom85%currentlytoover100%onceoutputfromRaspadskaya
recovers.EvrazsinternationalfootprintallowsittotakeselfsufficiencybeyondRussia
byexportingsemifinishedsteeltounitsintheUSandtheEU.
(307.0)
16.7
25.5
13.3 Russianstatisticsareencouragingbutsustainabilityisuncertain.Russiapostedfixed
10.2
7.2
investmentgrowthof6%YoYin2010,whileproductionofcement,bricksandplywood
2.0
1.6
roseanaverageof15%YoY.However,weneedtoseesustainedgrowthinthese
1.6
1.4
productsoveralongerperiod(probablyto2Q11)tobeconfidentthattheyreflectareal
0.3%
5.6%
0.5%
8.4% recoveryinconstructionandnotjustseasonalrestockingpatterns.
DowngradetoHOLDdespiteincreasedtargetpriceof$42.30/GDR.Aftergainingover
34%sinceourinitiationtoahighof$42.00/GDRinJan2011,Evrazhelditsground
duringtherecentcorrectionandisnowtradingat$38.21/GDR.Althoughweraisedour
TPto$42.30/GDRonstrongersteelpricesandsignsofarecoveryinRussian
construction,thisoffersonly11%upsidepotential,sowedowngradethestocktoHOLD.
Weneedtoseeasustainedrecoveryindomesticconstructionbeforewecanbelievethe
stockcouldofferanygreaterupside.
146
438
n/a
47
17.4%
16,731
24,269
1month(%)
3.2%
3month(%)
27.4%
12month(%)
15.1%
52weekhigh($)
42.72
52weeklow($)
21.80
Source:Bloomberg,Atonestimates
Se mi fi ni s he dproducts
Rai l wayproducts
Tubul arproducts
4Q09
38.21
n/a
10.7%
1:3
3Q09
Price(ordinaryGDR,$)
Price(pref,$)
Upsidepotential
Ordinary:GDRratio
2Q09
EVRLI
HK1q.L
1Q09
1,000
Bloombergcode
Reuterscode
2
0
Figure34:EvrazAtonestimates,newvsold
YearendDecember:
Newestimates($mn)
Oldestimates($mn)
Changevsold(%)
2010E
EBITDA
2011E
2012E
2,368
2,373
0.2%
3,361
3,431
2.0%
4,081
4,040
1.0%
3Yaverage
0.4%
2010E
Netincome
2011E
2012E
54
112
n/a
1,002
826
21.3%
1,574
1,297
21.4%
3Yaverage
21.3%
Source:Atonestimates
Figure35:EvrazAtonestimatesvsconsensus
YearendDecember:
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
EBITDA
2011E
3,361
3,553
5.4%
2010E
2,368
2,384
0.7%
2012E
4,081
4,068
0.3%
3Yaverage
1.9%
2010E
54
103
n/a
Netincome
2011E
1,002
1,208
17.1%
2012E
1,574
1,442
9.2%
3Yaverage
3.9%
Source:Bloomberg,Atonestimates
Figure36:EvrazValuationbreakdown
DCFcalculation($mn):
EBIT
Lesstaxation
Taxadj.EBIT
Depreciation
Lesscapex
Changeinworkingcapital
Freecashflow
Terminalvalue
NPVoffreecashflow
NPVofterminalvalue
Discountedcashflowvaluation:
NPVoffreecashflow
NPVofterminalvalue
Enterprisevalue
Plus:otherassets
Less:minorities
Less:netdebt
Equityvalue
Less:preferredstockvalue
Commonequityvalue
No.ordinaryshares(mn)
Valuepercommonshare
CommonsharestoGDRratio
ValueperGDR
Multiplesbasedvaluation:
Ratios:
14
7
Weightedaveragevaluation:
DCF
P/E
EV/EBITDA
Valuepershare($/GDR)
Potentialupside(%)
($mn)
8,547
17,746
26,293
319
7,219
18,755
18,755
146
128.50
0.3
42.83
Multiple
xEarnings
xEBITDA
2011E
1,795
(449)
1,346
1,566
(1,100)
(556)
1,256
1,056
(%)
32.5%
67.5%
100.0%
Value($mn)
18,034
18,509
2012E
2,472
(618)
1,854
1,609
(1,250)
(435)
1,778
1,573
$/GDR
41.18
42.27
Valuation
$/GDR
42.83
41.18
42.27
2013E
2014E
2,409
1,838
(602)
(460)
1,807
1,379
1,635
1,635
(1,000)
(750)
(222)
(10)
2,220
2,254
1,796
1,668
WACCcalculation:
Riskfreerate
Standardequityriskpremium
Countryspecificequitypremium
Liquidityriskpremium
Othercompanyspecificriskpremiums
Totalcostofequity
Currentcostofdebt
Effectivecorporatetaxrate
Costofdebtaftertax
Targetgearing(debt/equity)
WACC
Terminalgrowthrate
Weightings
Netvaluation
%
$/GDR
50%
21.42
25%
10.30
25%
10.57
100%
42.28
10.7%
2015E
1,409
(352)
1,057
1,635
(750)
20
1,963
1,328
2016E
1,198
(299)
898
1,635
(750)
37
1,820
28,679
1,126
17,746
%
4.50%
4.00%
3.20%
0.00%
1.00%
12.70%
7.00%
25.00%
5.25%
45.00%
9.35%
3.00%
Source:Atonestimates
2
1
Financial Accounts
Figure37:EvrazIFRSnetincomestatement($mn)
Revenue
Costofrevenueandotheroperatingcosts(exDD&A)
Unallocatedexpenses
EBITDA
EBITDAmargin
DD&A
Otherincome/(expenses)
EBIT
Netfinancialexpenses
Otherpretaxincome/(expenses)
Profitbeforetax
Incometaxexpenses
Profitaftertax
Minorityinterests
Profitattributabletoequityholdersofthecompany
Netmargin
Earningspershare:
BasicEPSperordinaryshare
No.ofordinaryshares
No.ofGDRs(1GDR=1/3ordinaryshare)
2008
20,380
(13,944)
(221)
6,215
30.5%
(1,195)
(1,388)
3,632
(598)
17
3,051
(1,192)
1,859
62
1,797
8.8%
14.6
123
370
2009
9,772
(8,399)
(136)
1,237
12.7%
(1,632)
(652)
(1,047)
(637)
84
(1,600)
339
(1,261)
(10)
(1,251)
12.8%
(9.3)
134
403
2010E
12,382
(9,964)
(50)
2,368
19.1%
(1,735)
(119)
514
(602)
45
(43)
(13)
(56)
(2)
(54)
0.4%
(0.4)
146
438
2011E
15,365
(11,954)
(50)
3,361
21.9%
(1,566)
1,795
(463)
45
1,377
(344)
1,033
31
1,002
6.5%
6.9
146
438
2012E
16,835
(12,704)
(50)
4,081
24.2%
(1,609)
2,472
(365)
45
2,153
(538)
1,615
40
1,574
9.4%
10.8
146
438
2013E
17,156
(13,061)
(50)
4,045
23.6%
(1,635)
2,409
(276)
45
2,178
(545)
1,634
41
1,593
9.3%
10.9
146
438
2014E
16,685
(13,162)
(50)
3,473
20.8%
(1,635)
1,838
(180)
45
1,703
(426)
1,277
32
1,246
7.5%
8.5
146
438
2015E
16,303
(13,208)
(50)
3,044
18.7%
(1,635)
1,409
(83)
45
1,371
(343)
1,028
26
1,002
6.1%
6.9
146
438
Source:Companydata,Atonestimates
Figure38:EvrazIFRSbalancesheet($mn)
Cashandcashequivalents
Inventories
Receivables
Othercurrentassets
Totalcurrentassets
Property,plantandequipment
Intangibleassets
Goodwill
Othernoncurrentassets
Totalnoncurrentassets
Assetsclassifiedforsale
Totalassets
Payables
Shorttermloansandleaseliabilities
Provisions
Totalcurrentliabilities
Longtermloans
Otherlongtermliabilities
Liabilitiesassociatedwithassetsclassifiedforsales
Totalnoncurrentliabilities
Shareholders'equity
Minorityinterests
Totalequity
Totalequityandliabilities
2008
930
2,416
2,349
589
6,284
9,012
1,108
2,167
873
13,160
7
19,451
2,538
3,937
63
6,538
6,064
1,932
7,996
4,672
245
4,917
19,451
2
2
2009
675
1,886
1,559
120
4,240
14,941
1,098
2,211
921
19,171
13
23,424
1,694
2,009
35
3,738
5,931
3,146
1
9,078
10,284
324
10,608
23,424
2010E
406
2,186
2,013
76
4,681
14,156
1,016
2,165
1,025
18,362
113
23,156
1,884
1,758
38
3,680
5,431
3,129
48
8,608
10,548
320
10,868
23,156
2011E
503
2,457
2,415
76
5,451
13,689
1,016
2,165
1,025
17,895
23,346
2,000
1,658
38
3,696
4,281
3,129
7,410
11,920
320
12,240
23,346
2012E
1,110
2,776
2,632
76
6,594
13,331
1,016
2,165
1,025
17,537
24,131
2,101
1,508
38
3,647
3,431
3,129
6,560
13,604
320
13,924
24,131
2013E
2014E
2015E
1,995
2,884
3,544
2,784
2,863
2,885
2,724
2,689
2,649
76
76
76
7,579
8,511
9,154
12,695
11,810
10,924
1,016
1,016
1,016
2,165
2,165
2,165
1,025
1,025
1,025
16,901
16,016
15,130
24,481
24,527
24,284
1,980
2,012
2,015
1,358
1,208
1,058
38
38
38
3,376
3,258
3,111
2,581
1,731
881
3,129
3,129
3,129
5,710
4,860
4,010
15,075
16,089
16,844
320
320
320
15,395
16,409
17,164
24,481
24,527
24,284
Source:Companydata,Atonestimates
Figure39:EvrazIFRScashflowstatement($mn)
Netincome
Adjustments:
Depreciation,depletionandamortisation
Othernoncashadjustments
Operatingprofitbeforechangesinworkingcapital
Changesinworkingcapital
Netcashprovidedbyoperatingactivities
Cashflowfrominvestingactivities:
Purchasesofproperty,plantandequipment
Otherinvestingactivities
Netcashusedforinvestingactivities
Cashflowfromfinancingactivities:
Proceedsfromissuanceofsharecapital,netoftransactioncosts
Proceedsfrombankloansandpromissorynotes
Repaymentofbankloansandpromissorynotes,includinginterest
Dividendspaidbytheparententitytoitsshareholders
Otherfinancingactivities
Netcashprovidedbyfinancingactivities
Effectsofexchangeratechangesoncashandcashequivalents
Cashandcashequivalentsatbeginningoftheperiod
Netincreaseincashandcashequivalents
Cashofdisposalgroupsclassifiedasheldforsale
Cashandcashequivalentsattheendoftheperiod
2
3
2008
1,859
1,195
1,672
4,726
(163)
4,563
(1,103)
(2,633)
(3,736)
(1)
5,657
(3,949)
(1,276)
(558)
(127)
(97)
327
603
930
2009
(1,261)
1,632
675
1,046
654
1,700
(441)
624
183
310
3,427
(4,987)
(90)
(809)
(2,149)
11
930
(255)
675
2010E
(56)
1,735
200
1,879
(516)
1,364
(950)
12
(938)
1,750
(2,500)
110
(640)
(55)
675
(269)
(21)
406
2011E
1,033
1,566
418
3,017
(556)
2,461
(1,100)
(1,100)
750
(2,000)
(14)
(1,264)
406
97
503
2012E
2013E
2014E
2015E
1,615
1,634
1,277
1,028
1,609
1,635
1,635
1,635
320
231
135
38
3,543
3,500
3,048
2,702
(435)
(222)
(10)
20
3,108
3,278
3,037
2,722
(1,250)
(1,000)
(750)
(750)
(1,250)
(1,000)
(750)
(750)
250
250
250
250
(1,250)
(1,250)
(1,250)
(1,250)
(250)
(394)
(398)
(311)
(1,250)
(1,394)
(1,398)
(1,311)
503
1,110
1,995
2,884
607
885
889
661
1,110
1,995
2,884
3,544
Source:Companydata,Atonestimates
MAGNITOGORSK
IRON AND STEEL
Growing HVA Output Offsets Cost Pressures
WeincreaseourtargetpriceforMMKto$16.20/GDR(up6%from$15.33/GDR)to
accountforstrongersteelpricesanditsgrowingexposuretoHighValueAdded(HVA)
products,whichshouldmitigatesomeoftherisingpressurefromcosts.Ournew
targetpriceoffers17%upsidepotentialfromthecurrentlevel,allowingustoreiterate
ourBUYratingonMMK.
Figure40:Domesticmarketremainsthefocusforhighvalueaddedproductsales
BUY
Target price
$16.20
Potential upside
Asia&
FarEast
17%
Middle
East
Other
8%
5%
10%
Bloombergcode
Reuterscode
Price(ordinaryGDR,$)
Price(pref,$)
Upsidepotential
Ordinary:GDRratio
Sharedata
No.ofordinaryshares(mn)
No.ofordinaryGDRs(mn)
No.ofprefshares(mn)
3Maveragedailyt/o($mn)
Freefloat(%)
Marketcapitalisation($mn)
Enterprisevalue($mn)
Majorshareholders
MinthaHoldingLimited
FulnekEnterprisesLimited
MMKLI
MAGNq.L
Domesticmarket
Machine
building
37%
21%
Spotsales
Russia&CIS
Source:Companydata
Financialsfor3Q10highlightgrowingcostpressures.MMKs3Q10IFRSresultsclearly
reflectthecostpressuresitfacesasoneofRussiasleastintegratedsteelmakers:EBITDA
wasdown11%QoQto$388mnduetohighercosts,withEBITDAmarginslippingto
18.9%from21.1%in2Q10(seeFigure41).
Figure41:MMK3Q10IFRSresultssummary($mn)
45.62%
41.01%
13%
Pipe
production
FINANCIALS($mn)
2009
10E
11E
Revenue
5,081
7,597 10,038
EBITDA
1,023
1,437
2,059
EBIT
288
643
1,219
Netincome
232
240
812
EPS
0.02
0.02
0.07
VALUATION
P/E(x)
51.1
49.5
14.6
P/CF(x)
15.2
11.1
153.8
EV/EBITDA(x)
14.9
10.6
7.4
EV/Sales(x)
3.0
2.0
1.5
P/BV(x)
1.2
1.2
1.1
RoCE(%)
1.9%
1.8%
5.7%
RoE(%)
2.3%
2.4%
7.7%
PERFORMANCE
1month(%)
11.0%
3month(%)
8.0%
12month(%)
8.1%
52weekhigh($)
16.23
52weeklow($)
8.90
Source:Bloomberg,Atonestimates
12%
Construction
12%
77%
13.82
n/a
17.2%
13:1
11,174
860
n/a
8
13.4%
11,879
15,228
Other
5%
2
4
3Q10
actual
2Q10
actual
QoQ
change
EBITDA
EBITDAmargin
Netincome
388
18.9%
43
437
21.1%
53
11.2%
18.9%
3Q10
Atonest.
3Q09
actualvs
Atonest.
3Q10
Interfax
consensus
3Q09
actualvs
consensus
404
4.0%
381
1.8%
19.7%
18.8%
78
44.9%
85
49.4%
Source:Companydata,Interfax,Atonestimates
Operatingresultsbelowexpectationsin4Q10,promptingrevisiontoFY10forecast.
MMKs4Q10productionnumberscameinbelowourexpectationswithQoQreductions
acrossmoststeelproductgroups;rolledproductoutputwasdown6%QoQto2.7mn
tonnes.ThenotableexceptionwasHVAproduction,whichaccountedfor42%of4Q10
shipments(upfrom38%in3Q10).AsaresultwerevisedourFY10netincomeforecast
down11%from$270mnto$240mn.
HVAproductsandverticalintegrationshouldhelpinprotectingmargins.The
companysMill5000,whichaccountsforalargeshareofHVAproductiongrowth,isnow
operatingatitsfullcapacityof1.5mntpaofthickplate.Togetherwithgrowingself
sufficiencyincokingcoal,thisshouldmitigatesomeofthecostpressuresexpectedin
2011.Onthedownside,theprofitabilityofitsAtakasJVremainsuncertain.Weestimate
MMKcouldeasilyadd3mnt(27%)ofsteelproductionfromexistingfacilitiesifmarket
conditionsimprove,quicklytranslatingintobetterfinancialperformance.
Targetpriceuppedto$16.20/GDR;BUYratingreiterated.Ournewtargetpriceimplies
17%upsidepotentialfromcurrentlevels,supportingourBUYratingonthestock.Future
reviewswilldependonMMKsabilitytomanageitscostexposureandprotectmargins
fromfurtherdeterioration.
Figure42:MMKAtonestimates,newvsold
YearendDecember
Newestimates($mn)
Oldestimates($mn)
Changevsold(%)
EBITDA
2011E
2,059
2,423
15.0%
2010E
1,437
1,535
6.3%
2012E
2,837
2,737
3.7%
3Yaverage
5.9%
2010E
240
270
11.2%
Netincome
2011E
812
872
6.8%
2012E
1,342
1,058
26.8%
3Yaverage
2.9%
Source:Atonestimates
Figure43:MMKAtonestimatesvsconsensus
YearendDecember
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
EBITDA
2011E
2,059
2,414
14.7%
2010E
1,437
1,557
7.7%
2012E
2,837
2,799
1.4%
3Yaverage
7.0%
2010E
240
380
36.8%
Netincome
2011E
812
1,047
22.4%
2012E
1,342
1,360
1.3%
3Yaverage
20.2%
Source:Bloomberg,Atonestimates
Figure44:MMKValuationbreakdown
DCFcalculation($mn):
EBIT
Lesstaxation
Taxadj.EBIT
Depreciation
Lesscapex
Changeinworkingcapital
Freecashflow
Terminalvalue
NPVoffreecashflow
NPVofterminalvalue
Discountedcashflowvaluation:
NPVoffreecashflow
NPVofterminalvalue
Enterprisevalue
Plus:otherassets
Less:minorities
Less:netdebt
Equityvalue
Less:preferredstockvalue
Commonequityvalue
No.ordinaryshares(mn)
Valuepercommonshare
Commonshares:GDRratio
ValueperGDR
Multiplesbasedvaluation:
Ratios:
14
7
Weightedaveragevaluation:
DCF
P/E
EV/EBITDA
Valuepershare($/GDR)
Potentialupside(%)
($mn)
4,810
11,811
16,621
421
2,928
13,272
13,272
11,174
1.19
13
15.44
Multiple
xEarnings
xEBITDA
2011E
1,219
(274)
945
840
(1,000)
(707)
77
65
(%)
28.9%
71.1%
100.0%
Value($mn)
15,076
13,786
2012E
1,907
(429)
1,478
930
(950)
(386)
1,072
940
$/GDR
17.63
16.12
Valuation
$/GDR
15.44
17.63
16.12
2013E
2014E
1,644
1,328
(370)
(299)
1,274
1,029
969
1,019
(850)
(650)
(96)
(27)
1,297
1,372
1,034
993
WACCcalculation:
Riskfreerate
Standardequityriskpremium
Countryspecificequitypremium
Liquidityriskpremium
Othercompanyspecificriskpremiums
Totalcostofequity
Currentcostofdebt
Effectivecorporatetaxrate
Costofdebtaftertax
Targetgearing(debt/equity)
WACC
Terminalgrowthrate
Weightings
Netvaluation
%
$/GDR
50%
7.72
25%
4.41
25%
4.03
100%
16.16
17.2%
2015E
1,121
(252)
869
1,037
(500)
31
1,437
945
2016E
1,009
(227)
782
1,063
(500)
49
1,393
19,758
833
11,811
%
4.50%
4.00%
3.20%
1.00%
0.00%
12.70%
5.00%
22.50%
3.88%
30.00%
10.05%
3.0%
Source:Atonestimates
2
5
Financial Accounts
Figure45:MMKIFRSnetincomestatement($mn)
Grossrevenue
Costofgoodssold
Selling,distributionandadministrativeexpenses
Otheroperatingexpenses/(income)
EBITDA(reported)
EBITDA(adjusted)
EBITDA(adjusted)margin
EBIT
Netforeignexchangegain/(loss)
Othernonoperatingincome/(loss)
Netinterestexpense
Otherincome/(expenses),net
Incomebeforetaxandminorityinterest
Incometax
Incomebeforeminorityinterest
Minorityinterest
Netincome
Netmargin
Earningspershare:
BasicEPSperordinaryshare
No.ofordinarysharesoutstanding
No.ofGDRs(1GDR=13ordinaryshares)
2008
10,550
(6,890)
(1,163)
(378)
2,204
2,119
20.1%
1,174
16
1
(18)
(67)
1,106
(25)
1,081
(6)
1,075
10.2%
0.10
11,160
858
2009
5,081
(3,205)
(802)
(51)
1,285
1,023
20.1%
288
9
180
(76)
(144)
257
(38)
219
13
232
4.6%
0.02
11,099
854
2010E
7,597
(4,944)
(1,064)
(152)
1,566
1,437
18.9%
643
(40)
10
(136)
(168)
310
(68)
242
(2)
240
3.2%
0.02
11,116
855
2011E
10,038
(6,322)
(1,556)
(100)
2,059
2,059
20.5%
1,219
(160)
1,059
(238)
821
(8)
812
8.1%
0.07
11,116
855
2012E
12,091
(7,259)
(1,874)
(121)
2,837
2,837
23.5%
1,907
(158)
1,749
(394)
1,356
(14)
1,342
11.1%
0.12
11,116
855
2013E
2014E
2015E
12,330
12,327
12,107
(7,682)
(7,945)
(7,951)
(1,911)
(1,911)
(1,877)
(123)
(123)
(121)
2,613
2,348
2,158
2,613
2,348
2,158
21.2%
19.0%
17.8%
1,644
1,328
1,121
(128)
(87)
(40)
1,516
1,241
1,081
(341)
(279)
(243)
1,175
962
838
(12)
(10)
(8)
1,163
952
830
9.4%
7.7%
6.9%
0.10
0.09
0.07
11,116
11,116
11,116
855
855
855
Source:Companydata,Atonestimates
2010E
248
202
1,249
1,084
203
2,986
12,218
34
299
25
562
154
13,292
16,277
972
1,151
23
2,146
2,378
1,403
3,781
5,927
405
9,945
16,277
2011E
246
202
1,650
1,299
182
3,579
12,378
34
299
25
562
154
13,452
17,031
1,022
1,039
23
2,084
2,578
1,403
3,981
6,065
405
10,560
17,031
2012E
490
202
1,817
1,388
165
4,062
12,398
34
299
25
562
154
13,472
17,534
922
892
23
1,837
2,328
1,403
3,731
5,568
405
11,560
17,534
2013E
2014E
2015E
958
1,557
2,270
202
202
202
1,773
1,773
1,741
1,421
1,469
1,470
168
174
174
4,523
5,176
5,858
12,279
11,910
11,373
34
34
34
299
299
299
25
25
25
562
562
562
154
154
154
13,352
12,983
12,446
17,875
18,159
18,305
822
722
622
789
816
817
23
23
23
1,634
1,561
1,462
2,078
1,828
1,578
1,403
1,403
1,403
3,481
3,231
2,981
5,115
4,792
4,443
405
405
405
12,355
12,962
13,457
17,875
18,159
18,305
Source:Companydata,Atonestimates
Figure46:MMKIFRSbalancesheet($mn)
Cashandcashequivalents
Otherinvestments
Accountsreceivables
Inventories
Othercurrentassets
Totalcurrentassets
Plant,propertyandequipment
Intangibleassets
Goodwill
Investmentsinaffiliates
Otherinvestments
Othernoncurrentassets
Totalnoncurrentassets
Totalassets
Shorttermloansandleaseliabilities
Accountsandnotespayable
Othercurrentliabilities
Totalcurrentliabilities
Longtermdebtandcapitalleases
Othernoncurrentliabilities
Totalnoncurrentliabilities
Totalliabilities
Minorityinterests
Totalshareholders'equity
Totalliabilitiesandshareholders'equity
2008
1,106
138
980
996
408
3,628
9,751
36
45
228
358
151
10,569
14,197
1,295
1,321
24
2,640
431
1,274
1,705
4,345
189
9,664
14,198
2
6
2009
165
221
941
856
247
2,430
11,276
37
309
22
627
132
12,403
14,833
828
928
21
1,777
1,290
1,441
2,731
4,508
368
9,957
14,833
Figure47:MMKIFRScashflowstatement($mn)
Operatingactivities:
Netincome
Adjustmentsfornoncashitems:
Depreciationandamortisation
Incometax
Netfinancecost
Otheradjustmentsfornoncashitems
Operatingprofitbeforechangesinworkingcapital
Changesinworkingcapital
Cashgeneratedfromoperations
Interestpaid
Incometaxrefund/(paid)
Netcashgeneratedbyoperatingactivities
Investingactivities:
Acquisitionofproperty,plantandequipment
Otherinvestingactivities
Netcashusedforinvestingactivities
Financingactivities:
Proceedsfromborrowings
Repaymentofborrowings
Dividendspaid
Otherfinancingactivities
Netcashprovidedbyfinancingactivities
Effectsofexchangeratechangesincashandcashequivalents
Cashandcashequivalentsatbeginningoftheperiod
Netincreaseincashandcashequivalents
Cashandcashequivalentsattheendoftheperiod
2
7
2008
1,075
945
25
18
715
2,778
(269)
2,509
(104)
(480)
1,925
(2,112)
1,133
(979)
3,974
(3,562)
(314)
(36)
62
(158)
256
850
1,106
2009
232
735
38
76
(115)
966
(127)
839
(109)
135
865
(1,613)
(76)
(1,689)
2,935
(2,974)
(16)
15
(40)
(77)
1,106
(941)
165
2010E
240
794
68
136
224
1,461
(245)
1,216
(110)
(70)
1,036
(2,118)
10
(2,108)
2,500
(1,250)
(48)
3
1,205
(50)
165
83
248
2011E
812
840
238
160
30
2,080
(707)
1,373
(165)
(217)
991
(1,000)
(1,000)
500
(250)
(203)
(40)
7
248
(2)
246
2012E
2013E
2014E
2015E
1,342
1,163
952
830
930
969
1,019
1,037
394
341
279
243
158
128
87
40
31
8
4
8
2,854
2,609
2,342
2,158
(386)
(96)
(27)
31
2,468
2,513
2,315
2,189
(172)
(170)
(152)
(135)
(376)
(345)
(285)
(243)
1,920
1,999
1,877
1,810
(950)
(850)
(650)
(500)
(950)
(850)
(650)
(500)
(350)
(350)
(350)
(350)
(336)
(291)
(238)
(207)
(40)
(40)
(40)
(40)
(726)
(681)
(628)
(597)
246
490
958
1,557
244
468
599
713
490
958
1,557
2,270
Source:Companydata,Atonestimates
NOVOLIPETSK
STEEL
Profitability Leader Despite Margin Pressures
WeupgradeourratingonNLMKfromHOLDtoBUYwitha12MTPof$49.40/GDR,
implying14%upsidepotential.Whileupsidemaybelimitedcomparedtoothersteel
stocks,NLMKsassetquality,healthybalancesheetandstrongprofitabilitymakeita
soundpotentialadditiontoanysteelcompanyportfolio,inourview.
Figure48:Salesandrevenuearefinelybalancedovermajormarkets
Regi ona l s a l es s tructure (3Q10)
BUY
Target price
$49.40
Potential upside
Bloombergcode
Reuterscode
Price(ordinary,$)
Price(pref,$)
Upsidepotential
Ordinary:GDRratio
Sharedata
No.ofordinaryshares(mn)
No.ofordinaryGDRs(mn)
No.ofprefshares(mn)
3Maveragedailyt/o($mn)
Freefloat(%)
Marketcapitalisation($mn)
Enterprisevalue($mn)
Majorshareholders
FletcherGroupHoldings
14%
USA
17%
NLMKLI
NLMKq.L
43.50
n/a
13.6%
5,993
599
n/a
19
12.9%
26,071
27,333
Russia
35%
USA
13%
Europe
22%
Russia
40%
Europe
21%
Source:CompanyData
Outlookfor4Q10highlightschallengingcostenvironment.NLMKreportedastrongset
of3Q10results,outperformingbothourandconsensusestimatesbyasubstantial
margin,recordingEBITDAof$695mnandnetincomeof$516mn(seeFigure49).
Figure49:NLMK3Q10USGAAPresultssummary($mn)
85.5%
2009
6,140
1,370
892
215
0.04
10E
8,382
2,384
1,882
1,332
0.22
11E
10,905
3,233
2,673
1,949
0.33
P/E(x)
P/CF(x)
EV/EBITDA(x)
EV/Sales(x)
P/BV(x)
RoCE(%)
RoE(%)
PERFORMANCE
121.2
101.5
20.0
4.5
3.0
1.9%
2.5%
19.6
100.1
11.5
3.3
2.7
10.7%
13.7%
13.4
76.5
8.5
2.5
2.3
14.3%
17.5%
1month(%)
7.6%
3month(%)
15.8%
12month(%)
42.2%
52weekhigh($)
51.00
52weeklow($)
25.04
Source:Bloomberg,Atonestimates
Other
12%
Middle
East
14%
HVAproductsunderpinprofitabilityleadership.AlthoughHVAproducts(e.g.pre
painted,transformeranddynamosteels)accountforonly30%ofNLMKssalesvolumes,
thepremiummarginstheseproductscommandunderpinitsprofitabilityleadershipover
peers,evenintimesofrisingcosts.Increasedlongsteeloutputshouldprovide
additionalupsideonceRussianconstructionactivityrecovers,inourview.
10:1
FINANCIALS($mn)
Revenue
EBITDA
EBIT
Netincome
EPS
VALUATION
Other
11%
Middle
East
15%
2
8
3Q10
actual
2Q10
actual
QoQ
change
EBITDA
EBITDAmargin
Netincome
695
30.5%
516
750
34.8%
466
7%
11%
3Q10
Atonest.
3Q09
actualvs
Atonest.
3Q10
Interfax
consensus
3Q09
actualvs
consensus
612
14%
646
8%
29.1%
30.2%
309
67%
409
26%
Source:Companydata,Interfax,Atonestimates
However,thecompanysoutlookfor4Q10highlightsthecostpressuresthebusinessis
facing:EBITDAmarginisexpectedataround25%vs31%in3Q10.
BuyingremainingstakeinDufercoJVcouldbeakeyvaluecatalyst.NLMK's
internationalexpansionhasfocusedonacquiringsteelrerollingassetstocompensate
forashortageofrollingcapacity.TheJVwithDuferco(SteelInvest&FinanceS.A.)aimed
togiveNLMKanoutletforitsexpandingslabproduction.Buyingtheremaining50%in
theJVcouldbecomeapowerfulvaluedriversupportinghighermarginsviasalesto
internationalmarkets(providedthepriceisrightandNLMKcanreturnthefacilitiesto
profitability).
TPraisedto$49.40/share,upgradetoBUY.Thestockhascorrectedaround15%from
itsJanuarypeakof$51.30/GDR.WhileournewTPimpliesjust14%upsidefromcurrent
levels,wehaveupgradedourratingtoBUYonNLMKsassetquality,strongbalance
sheetandprofitabilityleadershipvsglobalpeers,whichshouldkeepthestockamong
thetoppicksforanysteelfocusedportfolio,inourview.
Figure50:NLMKAtonestimates,newvsold
YearendDecember
Newestimates($mn)
Oldestimates($mn)
Changevsold(%)
EBITDA
2011E
3,233
3,263
0.9%
2010E
2,384
2,424
1.6%
2012E
4,397
3,700
18.8%
3Yaverage
5.4%
2010E
1,332
1,208
10.3%
Netincome
2011E
1,949
2,011
3.1%
2012E
2,753
2,293
20.1%
3Yaverage
9.1%
Source:Atonestimates
Figure51:NLMKAtonestimatesvsconsensus
YearendDecember
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
EBITDA
2011E
3,233
3,370
4.1%
2010E
2,384
2,400
0.7%
2012E
4,397
3,959
11.1%
3Yaverage
2.1%
2010E
1,332
1,311
1.6%
Netincome
2011E
1,949
2,047
4.8%
2012E
2,753
2,373
16.1%
3Yaverage
4.3%
Source:Bloomberg,Atonestimates
Figure52:NLMKValuationbreakdown
DCFcalculation($mn):
EBIT
Lesstaxation
Taxadj.EBIT
Depreciation
Lesscapex
Changeinworkingcapital
Freecashflow
Terminalvalue
NPVoffreecashflow
NPVofterminalvalue
Discountedcashflowvaluation:
NPVoffreecashflow
NPVofterminalvalue
Enterprisevalue
Plus:otherassets
Less:minorities
Less:netdebt
Equityvalue
Less:preferredstockvalue
Commonequityvalue
No.ordinaryshares(mn)
Valuepercommonshare
Commonshares:GDRratio
ValueperGDR
Multiplesbasedvaluation:
Ratios:
16
8
Weightedaveragevaluation:
DCF
P/E
EV/EBITDA
Valuepershare($/GDR)
Potentialupside(%)
($mn)
9,643
27,123
36,766
115
1,148
35,504
35,504
5,993
5.92
10
59.24
Multiple
xEarnings
xEBITDA
2011E
2,673
(601)
2,071
560
(1,800)
(491)
341
290
(%)
26.2%
73.8%
100.0%
Value($mn)
26,246
21,206
2012E
3,756
(845)
2,911
640
(1,500)
(478)
1,574
1,391
$/GDR
43.79
35.38
Valuation
$/GDR
59.2
43.8
35.4
2013E
2014E
3,923
3,953
(883)
(889)
3,040
3,063
696
710
(900)
(700)
(266)
(71)
2,570
3,002
2,077
2,219
WACCcalculation:
Riskfreerate
Standardequityriskpremium
Countryspecificequitypremium
Liquidityriskpremium
Othercompanyspecificriskpremiums
Totalcostofequity
Currentcostofdebt
Effectivecorporatetaxrate
Costofdebtaftertax
Targetgearing(debt/equity)
WACC
Terminalgrowthrate
Weightings
Netvaluation
%
$/GDR
50%
29.62
25%
10.95
25%
8.85
100%
49.41
13.6%
2015E
3,748
(843)
2,905
709
(700)
(39)
2,875
1,943
2016E
3,635
(818)
2,818
709
(700)
(39)
2,788
43,887
1,723
27,123
%
4.5%
4.0%
3.2%
0.0%
0.0%
11.7%
5.0%
22.5%
3.9%
30.0%
9.4%
3.0%
Source:Atonestimates
2
9
Financial Accounts
Figure53:NLMKUSGAAPP&Lstatement($mn)
Totalrevenue
COGS
Grossprofit
SG&A
Otheroperatingincome/(expense)
Operatingincome(EBIT)
EBITDA
DD&A
Netinterestincome/(expense)
Associates
FX(loss)/gain
Others(recurring)
Pretaxprofit
Tax
Equityinnetlosses/(earnings)ofassociates
Netincome(preexceptionals)
Minorityinterest
Netincome(postexceptionals)
EPS($/GDR)
DividendperGDR($)
NumberofGDRs(mn)
2009
6,140
(4,150)
1,990
(1,054)
(44)
892
1,370
(478)
(111)
(78)
(108)
595
(182)
(315)
98
117
215
0.36
0.07
599
2010E
8,382
(5,399)
2,982
(1,097)
(3)
1,882
2,384
(503)
(54)
(54)
(13)
1,761
(423)
(29)
1,310
22
1,332
2.22
0.31
599
2011E
10,905
(7,033)
3,872
(1,200)
2,673
3,233
(560)
(78)
2,595
(584)
(43)
1,969
(20)
1,949
3.25
0.98
599
2012E
13,524
(8,280)
5,244
(1,488)
3,756
4,397
(640)
(90)
3,666
(825)
(60)
2,781
(28)
2,753
4.59
1.38
599
2013E
2014E
2015E
14,839
15,184
15,298
(9,284)
(9,561)
(9,867)
5,555
5,623
5,431
(1,632)
(1,670)
(1,683)
3,923
3,953
3,748
4,619
4,662
4,457
(696)
(710)
(709)
(65)
(6)
70
3,858
3,947
3,818
(868)
(888)
(859)
(63)
(65)
(63)
2,927
2,994
2,896
(29)
(30)
(29)
2,898
2,964
2,868
4.83
4.95
4.78
1.45
1.48
1.44
599
599
599
Source:Companydata,Atonestimates
2010E
1,268
1,247
1,475
131
4,121
8,613
760
468
122
9,963
14,084
1,094
600
19
1,714
2,100
396
140
2,636
4,350
(108)
9,734
14,084
2011E
722
1,622
1,922
131
4,396
9,853
760
468
122
11,204
15,599
1,425
600
19
2,045
1,900
396
140
2,436
4,481
(108)
11,118
15,599
2012E
540
2,011
2,263
131
4,944
10,713
760
468
122
12,063
17,007
1,678
600
19
2,298
1,100
396
140
1,636
3,934
(108)
13,073
17,007
2013E
2014E
2015E
2,027
3,971
5,978
2,207
2,258
2,275
2,537
2,613
2,696
131
131
131
6,902
8,972
11,080
10,917
10,907
10,898
760
760
760
468
468
468
122
122
122
12,267
12,257
12,248
19,168
21,230
23,328
1,882
1,938
2,000
600
600
600
19
19
19
2,501
2,557
2,619
1,000
900
900
396
396
396
140
140
140
1,536
1,436
1,436
4,037
3,994
4,056
(108)
(108)
(108)
15,131
17,236
19,272
19,168
21,229
23,328
Source:Companydata,Atonestimates
Figure54:NLMKUSGAAPbalancesheet($mn)
Cash&shortterminvestments
Accountsreceivable
Inventory
Othercurrentassets
Totalcurrentassets
PP&E
Intangibleassets
Investments
Otherlongtermassets
Totalnoncurrentassets
Totalassets
Accountspayable
Shorttermdebt
Othercurrentliabilities
Totalcurrentliabilities
Longtermdebt
Deferredtaxliabilities
Othernoncurrentliabilities
Totallongtermliabilities
Totalliabilities
Minorityinterests
Totalshareholdersequity
Totalliabilitiesandequity
2009
1,699
913
1,134
131
3,877
7,316
760
468
81
8,625
12,502
841
557
19
1,417
1,939
396
140
2,475
3,892
(108)
8,610
12,502
3
0
Figure55:NLMKUSGAAPcashflow($mn)
2009
98
478
859
(41)
1,394
(1,121)
(651)
(1,771)
(2)
(533)
(535)
2,159
(912)
1,247
Netincome
DD&Aaddback
(Increase)/Decreaseinworkingcapital
Otheroperatingcashflowitems
Cashflowfromoperations
Capitalexpenditure
Acquisitions
Otherinvestingcashflow
Cashflowfrominvesting
Dividendspaid
Share(repurchase)/issue
Increase/(decrease)interestbearingliabilities
Cashflowfromfinancing
Cashandcashequivalentsatbeginningofyear
Netincrease/(decrease)incashandcashequivalents
Cashandcashequivalentsatendofyear
3
1
2010E
1,310
503
(422)
1,391
(1,800)
(1,800)
(185)
164
(21)
1,247
(431)
817
2011E
1,969
560
(491)
2,038
(1,800)
(1,800)
(585)
(200)
(785)
817
(547)
270
2012E
2,781
640
(478)
2,944
(1,500)
(1,500)
(826)
(800)
(1,626)
270
(182)
88
2013E
2014E
2015E
2,927
2,994
2,896
696
710
709
(266)
(71)
(39)
3,357
3,633
3,567
(900)
(700)
(700)
(900)
(700)
(700)
(869)
(889)
(860)
(100)
(100)
(969)
(989)
(860)
88
1,575
3,519
1,487
1,944
2,007
1,575
3,519
5,526
Source:Companydata,Atonestimates
SEVERSTAL
Unloved and Undervalued
WeupgradeourtargetpriceforSeverstalto$22.10/GDRandreiterateourBUYrating
ontheshares.PostponementofthecompanysgoldbusinessIPOwasa
disappointmentasitwasthemaindriverbehindthestockpriceappreciationseenin
recentmonths.Nevertheless,Severstaloffersplentyofupsideinitscurrentform,
whileapotentialswingbacktoprofitabilityintheUScouldleadtoupsidesurprises.
Figure56:NorthAmericaandEuropestillplayamajorroleinrevenuegeneration
Sa l es bybus i nes s (3Q10)
BUY
Target price
$22.10
Potential upside
Bloombergcode
Reuterscode
Price(ordinary,$)
Price(pref,$)
Upsidepotential
Ordinary:GDRratio
Sharedata
No.ofordinaryshares(mn)
No.ofordinaryGDRs(mn)
No.ofprefshares(mn)
3Maveragedailyt/o($mn)
Freefloat(%)
Marketcapitalisation($mn)
Enterprisevalue($mn)
Majorshareholders
AlexeyMordashov
10E
15,021
2,804
1,848
87
0.09
P/E(x)
P/CF(x)
EV/EBITDA(x)
EV/Sales(x)
P/BV(x)
RoCE(%)
RoE(%)
PERFORMANCE
n/a
11.0
26.5
1.7
2.3
7.9%
13.2%
n/a
15.0
8.0
1.5
2.0
0.7%
1.0%
Mining
excl.gold
15%
Europe
13%
North
America
31%
GoldbusinessIPOnotyetoutofthepicture.WhilepostponementoftheNordgold
IPOwasadisappointment,wedonotthinkSeverstalhascancelleditsplanstotakethe
companypublic.Ourownvaluationforthebusinessrangedfrom$2.4bnto$5.1bn.
Whilereachingthetopendoftherangecouldhavebeenhardtoachieve(especially
giventhecompetitionoftwoothersectorIPOsandthesaleof10%ofVTB),westillthink
thatNordgoldcouldpotentiallyachieveavaluationofaround$3.54bn,withupside
potentialof1015%overitscurrentvaluationasaSeverstalasset.
RecentfinancialshighlighttheUSswingfactorinprofitgeneration.Asexpected,
Severstals3Q10EBITDAdeclinedonloweroutputandprices.EBITDAmarginfellto19%
from22.5%in2Q10mostlyonincreasedcosts,butalsoduetotheUSbusinessturning
11E
EBITDAnegativeagain.Netincomeof$368mnwasaheadofourforecast,mainlydueto
18,767
positiveforexmovements(seeFigure57).
3,508
2,626
Figure57:Severstal3Q10IFRSresultssummary($mn)
1,603
1.59
11.1
41.5
6.4
1.2
1.9
11.6%
16.9%
1month(%)
7.0%
3month(%)
27.0%
12month(%)
42.9%
52weekhigh($)
19.78
52weeklow($)
9.35
Source:Bloomberg,Atonestimates
Russia
43%
Source:Companydata
1,008
1,008
n/a
47
17.6%
17,836
22,448
82.37%
2009
13,054
846
399
1,037
1.03
Gold
4%
Asia
8%
Russian
Steel
46%
USA
24%
SVST.LI
CHMFq.L
17.70
n/a
24.9%
FINANCIALS(mn)
Revenue
EBITDA
EBIT
Netincome
EPS
VALUATION
Other
China& 5%
Europe
11%
25%
1:1
Re gi onal s al e s s tructure(3Q10)
3
2
3Q10
actual
2Q10
actual
QoQ
change
EBITDA
EBITDAmargin
Netincome
751
19.1%
368
955
22.5%
192
21.4%
91.7%
3Q10
Atonest.
3Q09
actualvs
Atonest.
3Q10
Interfax
consensus
3Q09
actualvs
consensus
747
0.5%
748
0.4%
19.8%
19.4%
286
28.7%
315
16.8%
Source:Companydata,Interfax,Atonestimates
USbusinessmaybethekeytoupsidesurprises.Webelievetherecoveryinsteel
outputcurrentlyunderwayintheUScombinedwithstrengtheningsteelpricesmaylead
toanimprovedfinancialperformancebySeverstalsUSassets.Inourview,thiscould
helpoffsetmarginreductionsinRussia,leadingtopositivefinancialresultssimilarto
whatwasseenbrieflyin2Q10.
WereiterateourBUYrating,TPincreasedto$22.10/GDR.Weincreaseourtargetprice
forSeverstalby19%to$22.10/GDR,implying25%upsidepotentialtocurrentlevels.We
maintainourBUYratingaswebelievethestockoffersplentyofupsideevenwithoutthe
shorttermdriverofthepotentialNordgoldIPO.ArecoveryintheUSmarketcould
resultinupsidesurprises,inourview.
UScapacityutilisationhasimprovedsubstantiallysincetheendof2010
UtilisationofinstalledsteelmakingcapacityintheUShasbeenslowlyrecoveringsince
reachingalowat33.5%attheendofDec2008.Utilisationaveragedaround70%in
2010,risingtoabout75%bymidsummer;formostoftheperiodsinceOct2010,itsat
below70%.However,utilisationratesrecoveredstronglyfrom68%attheendofDec
2010to74%inthefirstweekofFebruary.Thisequatestonearly600ktofmonthlyUS
steeloutput,uparound9%onDec2010(seeFigure58).
Figure58:UScapacityutilisationisupsharply
Figure59:andsoareUSsteelprices
CapacityutilisationintheUSissharplyup,
reaching74%attheendofJan2011...
Feb11
Jan11
Dec10
Oct10
Sep10
Aug10
Nov10
Source:Bloomberg
Jul10
Jan10
Feb11
Jan11
Dec10
Nov10
Oct10
Sep10
Aug10
Jul10
Jun10
May10
Apr10
Mar10
Jan10
60.0%
Feb10
vs67%attheendofJan2010
Jun10
66.9%
65.0%
May10
70.0%
Apr10
170
160
150
140
130
120
110
100
90
73.7%
USsteelpricesarealsoup
sincethebeginningof2011
Feb10
74.8%
75.0%
Mar10
80.0%
Source:Bloomberg
USsteelpricesseemtoberising,too
Figure59showsthesharpincreaseinUSsteelpricesfromDec2010toJan2011:HRC
pricesincreasedanaverage40%from$595600/tonto$825845/ton,whilerebarprices
gainedapproximately16%,risingfrom$650660/tonto$750775/ton.
Evenifweassumethatrecentcapacityutilisationratesandpriceincreaseswerepartly
drivenbyseasonalrestockingandshouldweakengoingforward,westillestimatethat
1Q11pricesandcapacityutilisationwillexceedtheDec2010levels.
SeverstalsUSunitneedsaminorupliftinoutputandpricestobecomeEBITDA
positiveagain
Severstalsurprisedontheupsidelastyearbyreporting2Q10resultsfaraheadofmarket
expectations.ThebiggestgaincamefromitsUSbusiness,whichproducedEBITDAof
$59mnafteralossof$83mnin1Q10(andlossesinthefivepreviousquarters).
Moreover,thebusinessnearlybrokeevenattheoperationallevelwithalossofonly
$1mn.Thisimprovedperformancewasdrivenbya15%QoQincreaseinsalesvolumes
andan8%QoQincreaseinaveragerealisedprices.GiventheapparentdirectionofUS
capacityutilisationandprices,webelievethatarepeatofthestrong2Q10performance
isachievablein2011andcouldperhapsbemoresustainablethantheperformanceseen
lastyear.
3
3
Figure60:SeverstalAtonestimates,newvsold
YearendDecember
Newestimates($mn)
Oldestimates($mn)
Changevsold(%)
EBITDA
2011E
3,508
3,961
11.4%
2010E
2,804
3,315
15.4%
2012E
3,508
4,155
15.6%
3Yaverage
14.2%
2010E
87
9
n/a
Netincome
2011E
1,603
1,598
0.3%
2012E
2,029
1,802
12.6%
3Yaverage
6.4%
Source:Atonestimates
Figure61:SeverstalAtonestimatesvsconsensus
YearendDecember
Atonestimates($mn)
Bloombergconsensus($mn)
Atonvsconsensus(%)
EBITDA
2011E
3,508
3,841
8.7%
2010E
2,804
2,942
4.7%
2012E
3,508
4,016
12.6%
3YAverage
8.7%
2010E
87
1,061
n/a
NetIncome
2011E
1,603
1,849
13.3%
2012E
2,029
1,970
3.0%
3YAverage
5.1%
Source:Bloomberg,Atonestimates
Figure62:SeverstalValuationbreakdown
DCFcalculation($mn):
EBIT
Lesstaxation
Taxadj.EBIT
Depreciation
Lesscapex
Changeinworkingcapital
Freecashflow
Terminalvalue
NPVoffreecashflow
NPVofterminalvalue
Discountedcashflowvaluation:
NPVoffreecashflow
NPVofterminalvalue
Enterprisevalue
Plus:otherassets
Less:minorities
Less:netdebt
Equityvalue
Less:preferredstockvalue
Commonequityvalue
No.ordinaryshares(mn)
Valuepercommonshare
Commonshares:GDRratio
ValueperGDR
Multiplesbasedvaluation:
Ratios:
14
7
Weightedaveragevaluation:
DCF
P/E
EV/EBITDA
Valuepershare($/GDR)
Potentialupside(%)
($mn)
8,209
17,262
25,471
281
4,331
20,859
20,859
1,008
20.69
1
20.69
Multiple
xEarnings
xEBITDA
2011E
2,676
(669)
2,007
832
(1,552)
(857)
429
363
(%)
32.2%
67.8%
100.0%
Value($mn)
25,426
22,089
2012E
3,244
(811)
2,433
877
(1,311)
(464)
1,535
1,327
$/GDR
25.22
21.91
Valuation
$/GDR
20.69
25.22
21.91
2013E
2014E
3,308
3,121
(827)
(780)
2,481
2,341
882
879
(1,073)
(823)
(78)
72
2,211
2,468
1,720
1,728
WACCcalculation:
Riskfreerate
Standardequityriskpremium
Countryspecificequitypremium
Liquidityriskpremium
Othercompanyspecificriskpremiums
Totalcostofequity
Currentcostofdebt
Effectivecorporatetaxrate
Costofdebtaftertax
Targetgearing(debt/equity)
WACC
Terminalgrowthrate
Weightings
Netvaluation
%
$/GDR
50%
10.35
25%
6.31
25%
5.48
100%
22.13
24.9%
2015E
3,023
(756)
2,267
877
(573)
80
2,651
1,670
2016E
2,720
(680)
2,040
877
(545)
100
2,472
30,448
1,401
17,262
%
4.50%
4.00%
3.20%
0.00%
1.00%
12.70%
8.50%
25.00%
6.38%
25.00%
11.12%
3.0%
Source:Atonestimates
3
4
Financial Accounts
Figure63:SeverstalIFRSnetincomestatement($mn)
Grossrevenue
Costofgoodssold
Grossprofit
SGAanddistributionexpenses
Otheroperatingincome/(expense)
EBITDA
EBITDAmargin
Operatingprofit
Nonoperatingexpenses
EBIT
Netfinancingexpense
Forexdifferences
Pretaxprofit
Incometax
Profit/(loss)fromdiscontinuedoperations
Profit/(loss)beforeminorityinterest
Minorityinterest
Profit/(loss)fortheyear
Netmargin
Earningspershare:
BasicEPSpercommonshare
No.ofcommonsharesoutstanding
No.ofGDRs(1GDR=1commonshare)
2008
22,393
(16,500)
5,893
(2,145)
468
5,366
24.0%
4,216
(1,009)
3,207
(353)
(275)
2,579
(517)
2,062
(33)
2,029
9.1%
2.01
1,007
1,007
2009
13,054
(11,356)
1,698
(1,600)
(244)
846
6.5%
(145)
(253)
(399)
(497)
(205)
(1,101)
(18)
(1,119)
82
(1,037)
7.9%
(1.03)
1,005
1,005
2010E
15,021
(11,010)
4,011
(1,694)
(344)
2,804
18.7%
1,973
(125)
1,848
(436)
(50)
1,362
(341)
(1,115)
(93)
6
(87)
0.6%
(0.09)
1,005
1,005
2011E
18,767
(13,661)
5,107
(2,081)
(350)
3,508
18.7%
2,676
(50)
2,626
(361)
(50)
2,215
(554)
1,661
(58)
1,603
8.5%
1.59
1,005
1,005
2012E
20,823
(14,928)
5,895
(2,300)
(350)
4,121
19.8%
3,244
(50)
3,194
(341)
(50)
2,804
(701)
2,103
(74)
2,029
9.7%
2.02
1,005
1,005
2013E
20,778
(14,839)
5,938
(2,281)
(350)
4,190
20.2%
3,308
(50)
3,258
(245)
(50)
2,963
(741)
2,222
(78)
2,145
10.3%
2.13
1,005
1,005
2014E
20,394
(14,687)
5,706
(2,235)
(350)
4,000
19.6%
3,121
(50)
3,071
(121)
(50)
2,900
(725)
2,175
(76)
2,099
10.3%
2.09
1,005
1,005
2015E
20,029
(14,471)
5,558
(2,186)
(350)
3,899
19.5%
3,023
(50)
2,973
15
(50)
2,938
(734)
2,203
(77)
2,126
10.6%
2.12
1,005
1,005
Source:Companydata,Atonestimates
Figure64:SeverstalIFRSbalancesheet($mn)
Cashandcashequivalents
Shorttermbankdeposits
Receivables
Inventories
Othercurrentassets
Assetsheldforsale
Totalcurrentassets
Plant,propertyandequipment
Intangibleassets
Othernoncurrentassets
Restrictedcash
Totalnoncurrentassets
Totalassets
Shorttermdebtandcurrentportionoflongtermdebt
Payables
Liabilitiesrelatedtoassetsheldforsale
Othercurrentliabilities
Totalcurrentliabilities
Longtermdebt
Othernoncurrentliabilities
Totalnoncurrentliabilities
Totalliabilities
Minorityinterests
Totalshareholders'equity
Totalliabilitiesandshareholders'equity
2008
2,653
819
2,006
4,272
927
9
10,685
9,827
1,511
469
22
11,829
22,514
2,039
1,600
0
1,199
4,838
6,227
1,896
8,123
12,961
501
9,051
22,514
3
5
2009
2,853
96
1,484
2,974
753
24
8,185
9,485
1,369
587
18
11,459
19,644
1,478
1,395
12
943
3,828
5,749
1,691
7,440
11,268
498
7,878
19,644
2010E
1,459
165
1,881
2,715
861
24
7,105
9,212
1,369
587
18
11,186
18,290
889
1,146
916
2,951
4,653
1,691
6,344
9,295
220
8,775
18,290
2011E
210
165
2,406
3,556
987
24
7,348
9,736
1,369
587
18
11,710
19,058
789
1,712
985
3,486
4,153
1,691
5,844
9,330
220
9,508
19,058
2012E
319
165
2,691
3,977
1,031
24
8,208
10,145
1,369
587
18
12,119
20,327
639
1,968
1,015
3,622
3,153
1,691
4,844
8,466
220
11,640
20,327
2013E
2014E
2015E
1,101
2,204
3,580
165
165
165
2,778
2,727
2,678
3,964
3,923
3,865
1,030
1,024
1,016
24
24
24
9,062
10,068
11,329
10,311
10,231
9,902
1,369
1,369
1,369
587
587
587
18
18
18
12,285
12,204
11,876
21,347
22,272
23,205
489
339
189
1,962
1,942
1,913
1,015
1,010
1,004
3,466
3,290
3,106
2,153
1,153
153
1,691
1,691
1,691
3,844
2,844
1,844
7,310
6,134
4,950
220
220
220
13,816
15,918
18,035
21,347
22,272
23,205
Source:Companydata,Atonestimates
Figure65:SeverstalIFRScashflowstatement($mn)
Operatingactivities:
EBIT
Adjustmentsfornoncashitems:
Depreciationandamortization
Impairment/(reversalofimpairment)ofassets
Otheradjustmentsfornoncashitems
Operatingprofitbeforeworkingcapitalchanges
Changesinworkingcapital
Cashgeneratedfromoperations
Interestpaid(excludingbankingoperations)
Incometaxpaid
Netcashprovidedbyoperatingactivities
Investingactivities:
Additionstoproperty,plantandequipment
Otherinvestingactivities
Netcashusedforinvestingactivities
Financingactivities:
Proceedsfromdebtfinance
Repaymentofdebtfinance
Otherfinancingactivities
Netcashprovidedbyfinancingactivities
Effectsofexchangeratechanges
Cashandcashequivalentsatbeginningofyear
Netincreaseincashandcashequivalents
Cashandcashequivalentsatyearend
2008
3,207
1,087
1,540
74
5,909
(1,018)
4,891
(363)
(1,094)
3,434
(2,031)
288
(4,811)
7,542
(3,686)
(1,432)
2,424
(17)
1,623
1,030
2,653
3
6
2009
(399)
957
219
(284)
493
1,722
2,215
(552)
(52)
1,611
(946)
692
(254)
4,355
(5,421)
(92)
(1,158)
2
2,653
200
2,853
2010E
1,848
781
100
2,730
(431)
2,299
(601)
(341)
1,357
(638)
(98)
(736)
(1,685)
(1,685)
(330)
2,853
(1,394)
1,459
2011E
2,626
832
25
3,483
(857)
2,625
(543)
(554)
1,529
(1,552)
73
(1,478)
(1,300)
(1,300)
1,459
(1,249)
210
2012E
3,194
877
25
4,096
(464)
3,632
(419)
(701)
2,511
(1,311)
58
(1,252)
(1,150)
(1,150)
210
109
319
2013E
2014E
2015E
3,258
3,071
2,973
882
879
877
25
25
25
4,165
3,975
3,874
(78)
72
80
4,086
4,046
3,955
(349)
(257)
(165)
(741)
(725)
(734)
2,996
3,064
3,055
(1,073)
(823)
(573)
8
13
44
(1,065)
(810)
(529)
(1,150)
(1,150)
(1,150)
(1,150)
(1,150)
(1,150)
319
1,101
2,204
782
1,103
1,376
1,101
2,204
3,580
Source:Companydata,Atonestimates
DisclosuresAppendix
This investment research has been prepared by ATON LLC, regulated by the Federal Service for Financial Markets of the Russian Federation, and, except as otherwise specified herein, is
communicatedbyATONLINELIMITED,regulatedbytheCyprusSecuritiesandExchangeCommission.
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