Page 200 - RusRPTMay21

for 2Q21 suggests further improvement in earnings is ahead.
An additional positive driver for the stock is the decision to restart the EAF in Turkey, which might add 10% to MMK’s EBITDA. We raise our 12-month Target Price to $16/DR. As this suggests an ETR of 64%, we reiterate our Buy recommendation.
Positive surprise on dividends and FCFE due to lower capex. While EBITDA was in line with us and the consensus, FCFE of $125mn was twice our forecast, mainly due to the temporarily lowered capex of $40mn ($1bn guidance for 2021 was reiterated). As such, 1Q21 dividends of $0.31/DR were also significantly above our estimates, offering a 2.8% yield. The company applied a 216% dividend payout to FCFE, leaving supportive outlook for 2Q21-4Q21 dividends.
Positive outlook provided for 2Q21. MMK sees global steel markets remaining tight in the short-term, while noting a seasonal pick-up in demand in Russia, with demand slightly ahead of its expectations. As such, the company expects a strong, 8-9% q/q rise in steel product shipments (reiterating 2021 guidance at 12mnt for Russian division), with an increase in domestic sales and a rise of HVA to 42-43% (vs. 39.7% in 1Q21) due to CRC mill 1,500 expansion.
Management also notes that at the moment, the price environment is highly supportive: the company is selling export HRC at $1,000/t on a FCA basis, suggesting that FOB is even higher, while June domestic sales are booked at a similar price (21% above spot).
Turkish EAF to restart; potential 10% upside to EBITDA. Thanks to the generous HRC-scrap spread in Turkey, the company has decided to restart the 1mnnt EAF at MMK’s Turkey division. The first steel might come in 3-5 months, and with a capex requirement at just $40mn and local working capital requirement at $200mn (which is to be optimised so that the effect at the consolidated level is lower). We believe that the event might be a positive trigger for the stock: the current HRC-rebar spread suggests the asset could add $350-400mn of EBITDA (10% of MMK 2021F).
12-mo TP up on higher earnings. We have marked-to-market our 2Q-4Q21 steel prices forecast, lifting our 12-mo TP 23% to $16/DR, which implies a 64% ETR (Buy). On our new forecasts, MMK trades at 2.5x 2021F EV/EBITDA, with a 24% 2021F dividend yield (even assuming a below-spot $770/t Russian domestic HRC in 2021F) which we view as attractive.
Magnitogorsk Iron and Steel Works (MMK) 1Q21 operating results were modest overall, with total sales 5% below our expectations due to the
200 RUSSIA Country Report May 2021 www.intellinews.com