Page 145 - RusRPTAug21

EBITDA forecast and 13% above our FCF and DPS estimates.
Prices being at all-time highs could result in a correction to the downside. Management acknowledges the uniqueness of the current pricing situation as steel prices are at all-time highs ($1,400/t, HRC, Russian market), and the company expects a modest correction in pricing to the downside (c. 10%). The restart of industrial activities has stimulated steel demand, although domestic steel producers were late to restart capacities, Severstal’s CFO noted. Although the introduction of a new export tax on the Russian market starting in August (Market reacts to the new export tax, 28 June) should not create additional demand (although the company expects to see a 3% y/y growth in Russian steel consumption in 2021), management believes it should lower domestic prices.
Regulatory changes await on both sides of the border. SVST is in discussions with the Russian government about the new export tax, and the company has made no changes to its long-term capital investment plans for now. We estimate that the new export tax will lower Severstal’s 2021 EBITDA 4% and its 2022 EBITDA 15% if in effect through all of 2022 (New export tax to affect RUSAL, Evraz, NLMK the most, 25 June). Management indicated that the European Commission’s announcement of the Carbon Border Adjustment Mechanism could cost Severstal an additional $70mn per year starting in 2022 if the new tax is still in place.
Magnitogorsk Iron and Steel Works (MMK) has reported strong 2Q21 earnings, with EBITDA 6% above the consensus estimates. FCF was also solid, translating into a 5.6% DY for the quarter.
We mark-to-market our 2H21 steel price forecasts and now expect a more gradual decline in prices in 2022 towards the mid-cycle averages. However, we think that a much sharper price normalisation is priced in to consensus, pointing to potential upgrades, and thatMMK’s shares could outperform consensus in the next 12 months. MMK offers a 35.8% 12-mo forward dividend yield, the leading figure in Russian steels, and we reiterate our Buy with an unchanged 12-month Target Price of $16/GDR.
Positive surprise from costs. MMK’s revenues for the quarter came broadly in line with consensus, while EBITDA was 6% higher, implying a major surprise on the costs side. We, however, slightly overestimated revenues, by 2% and, as such, this translated into EBITDA.
Prices marked-to-market for 3Q-4Q21 and 2022. We now expect a gradual normalisation of steel and bulks prices in the medium term towards the mid-cycle averages. This yields a 30% higher EBITDA forecast for 2021F and 53% for 2022F.
Outlook on 3Q21 earnings remains bright. The company expects a seasonally stronger 3Q21 with a higher share of HVA. That, along with the favourable price environment, might lead to further growth in
145 RUSSIA Country Report August 2021 www.intellinews.com