Page 202 - RusRPTMay21

revenues. As steel prices continue to surprise us on the upside, we mark-to-market our 2021F forecast, which results in a 30% rise in our 12-month TP to USD 26/DR. There would be material upside to our FY21F earnings forecasts if there were no price decline in 2H21.
Volumes in line, with better mix. While 1Q21 crude steel output slightly exceeded our estimates, coking coal volumes trailed our forecasts due to prolonged long-wall repositioning. Steel sales volumes were slightly below our expectations, which is also true for prices. We note, however, that despite lower realised HVA product prices (mainly due to HDG and LDPs), the company positively surprised us with higher share of HVA despite increased exports.
EBITDA beat on limited costs pick-up. Despite revenues of USD 2.22bn being 4-8% below consensus and our estimates, the company reported 6-9% higher EBITDA of USD 1.16bn – the highest since 3Q08 (USD 1.55bn, while the all-time record was in 3Q08, USD 2.76bn). The integrated slab cash cost of USD 185/t matched our estimates, so outperformance came mainly from the absence of a rise in SG&A. Accordingly, the company reported stronger FCFE of USD 493mn. The announced dividend of USD 517mn (2.9% yield) accounted for 92% of adjusted FCFE and matched our estimates.
Domestic HRC premium might not be realised in the short-term. Management noted that given the more than a 30% rise in the HRC export price YTD, it now does not expect Russian domestic HRC to be at a premium in the short-term. In 1Q21, the company decreased its share of domestic sales to 51%, 10pp below historical average, which, if maintained, would enable the company to capture stronger export pricing momentum in 2Q21.
TP up on higher earnings. We stick to our approach of valuing steel names using a 20% discount to fair EV/EBITDA on 2021F EBITDA (see our EM Europe Steel – Catch It If You Can). As such, marking-to-market our 2Q-4Q21 forecasts results in a 30% increase in 12-mo TP to USD 26/DR. We therefore reiterate our Buy recommendation. On our new steel price forecast (which assumes HRC FOB Black Sea reaching USD 1,000/t in 2Q21 but declining to USD 650/t on iron ore price normalisation), Severstal offers 4.0x EV/EBITDA and a 16% dividend yield. We note that the absence of steel/iron ore price declines in 2H21 would put material upside on our 2021F forecasts.
Severstal has held an investor call, dedicated to its 1Q21 results. The key highlights are given below.
· The company expects to increase the share of HVA in its sales
202 RUSSIA Country Report May 2021 www.intellinews.com