Page 118 - RUSRptSept18

Zvezda as an excuse to keep accumulating funds in quasi-state Rosneftegaz and dodge government's demand for dividend payments . The 120MW nuclear-powered icebreaker is needed to clear 50 meter wide corridors on the Northern Sea Route , breaking ice of up to 4.3 meter thick and leading the ship caravans at 10-12 knots speed. Reportedly, the cost of the giant ship exceeds RUB100bn ($16bn), while investment in Zvezda shipyard is estimated at RUB200bn). At the same time the main competitor of Sechin's Zvezda for Leader contract is Baltzavod OSK, which has historically been the shipyard with the track record and competence for building nuclear icebreakers, currently building three ships and having two other orders pending, Kommersant r eminds.
Magnitogorsk Iron and Steel Works (MMK) has reported its the second quarter of 2018 earnings, which beat the consensus estimates on better performance from the Turkish and coal segments. With net debt below 0, MMK announced dividends of $280mn. This suggests the FCFE ratio of >100% has been maintained for the third quarter in a row, which improves the company’s dividend outlook. As such, we increase our forecast pay-out ratio to 100%, which suggests a 13% next 12-month dividend yield. We see the company’s valuation as remaining attractive (26% discount to its Russian peers on 2019F EV/EBITDA). VTB Capital (VTBC) unchanged 12-month Target Price of $12.00 implies an ETR of 39%. EBITDA of $648mn was 2-3% above expectations (Figure 1) thanks to better performance from the Turkish steel and coal divisions. Russian Steel’s performance was in line. Slab cash costs of $290/t matched our estimates. FCFE, at $281mn, was slightly below our forecast, thanks to a lower working capital build-up. Nevertheless, net debt was down to a negative $81mn, which matched our estimates. The net cash position supports 100% dividend pay-out. MMK announced DPS of RUB 1.589/share, a $280mn overall pay-out, implying a 3.5% quarterly dividend yield. This is the third quarter in a row it has paid more than 100% of FCFE in dividends (MMK’s dividend policy stipulates a minimum of 50%). Slight capex overrun possible. Despite the fast capex run rate in the first half of 2018 ($494mn), we do not rule-out that 2018 might slightly exceed MMK’s guidance for 2018, $800mn, due to accelerated investment in previously announced projects, including a new sintering plant (replacing old capacity). Domestic market outlook remains supportive. MMK expects seasonally lower business activity in the third quarter of 2018, although full capacity utilisation supports the domestic HRC premium. We agree (per our Steel & Bulks Watch – August 2018 of 1 August) and expect the premium to return to the $50/t level. 13% next-12-month DY. We mark-to-market our MMK earnings forecasts for 2018 to account for the first half of 2018A. However, we maintain our conservative view on steel prices for the second half of 2018 and 2019 (hence, 2019 earnings are unchanged, per Figures 2 and 4). Given MMK has been steadily paying 100%+ of FCFE in dividends, we increase our dividend pay-out ratio forecast to 100%, which implies a 13% next-12-month dividend yield, the second highest in the Russian steel universe after Severstal. Coupled with an undemanding valuation of 4.5x 2019F EV/EBITDA, a 26% discount to the company’s Russian peers (Figure 3), this supports our Buy recommendation.
Polyus Gold reported slightly positive the second quarter of 2018 numbers , as earnings exceeded our estimates on better costs and a tax gain (but matched consensus). While the working capital build-up is only going to be partly compensated in the second half of 2018 and capex might exceed guidance slightly, the the first half of 2018 cost performance comfortably fits into the ‘below $425/oz’ guidance for 2018, in our view, especially, given the higher contribution from antimony in the second half of 2018. Although the political risks continue to weigh on the stock’s performance, we are reiterating our Buy recommendation as our unchanged 12-month Target Price of $52 implies a 54% ETR. EBITDA beat on better costs. EBITDA came 4% above our forecast (although in line with consensus) mainly because total cash costs before by-product, at $354/oz, were better than the $364/oz we expected, while SG&A was in line. Better costs at Verninskoye and Alluvials more than
118 RUSSIA Country Report September 2018 www.intellinews.com