Page 118 - RusRPTDec18

registration is in Russia's Special Administrative District (SADs or SARs), a domestic offshore zone the Russian government introduced in August on Russky and Oktyabrskiy islands. Previously the anticipated move was considered to be a Plan B in case the US sanctions remain in effect longer than expected. Currently the sum granted would be enough to buy about 80,000 tonnes on aluminium, which is insignificant compared to 3.7mn tonnes of the metal produced by Rusal in 2017. The company exports about 80% of its output. In the third quarter of 2018 Rusal was thrown another lifeline by the US Treasury, as the company's clients were allowed to prolong contracts and sign new ones without fearing secondary sanctions, largely seen as an attempt to avoid shocks in the global aluminium supply chains. The company sold 1.05mn tonnes of aluminium in the third quarter of 2018, up by 33% quarter-on- quarter and 8% year-on-year. As a result the revenues jumped by 30% q/q and 18.6% y/y.
One of the longest shareholder conflicts in Russian corporate history is not over, as the High Court of London allowed the holding companies Interros and Crispian of billionaires Vladimir Potanin and Roman Abramovich to appeal June's bank decision on sale of shares in metals major Norilsk Nickel, according to Interfax. In June the court resolved the case in favour of Rusal of Oleg Deripaska, ruling that Abramovich breached the shareholder agreement when selling 2.1% stake in NorNickel to Potanin. After the deal, Interros increased its stake in the company to 32.9%, with Rusal owning 27.8%, but the deal has been reportedly reversed in September. "The trial is at an early stage and the outcome is unclear, so we treat this news as neutral for now," VTB Capital commented on the appeal possibility on November 28, reminding that NorNickel generates attractive free cash flow and dividend yields. "Progress on growth projects might be a catalyst for the name as could consensus upgrades, were they to happen," VTB said. Norilsk Nickel is one of the most attractive dividend stories in Russian metals universe, paying $2.1bn in total for 2017. Cash flow and dividend policy was in the heart of the conflict between Deripaska and Potanin, with the latter wanting to lower dividends in favour of growth.
Magnitogorsk Iron and Steel Works (MMK) has reported positive 3Q18 earnings, performing better on earnings and announcing 10% higher dividends than we expected (4.4% quarterly yield). In the meantime, as the company has decided to bring forward capex for its main investment projects, the capex guidance for 2018 was raised and suggests that the 2019-20 FCFE yield outlook is now down in line with peers (9-10%). With a 15-25% lower 2019F P/E/ EV/EBITDA than Russian peers, the non-integrated name is likely to be the most resilient to the downturn in steel & bulks prices that we expect. BCS unchanged 12-month Target Price of $12 implies a 39% ETR: Buy reiterated. Better earnings on lower costs. Lower steel SG&A and lower costs at the coking coal division contributed to a 3-4% better EBITDA of $671mn. While net income of $400mn was lower than we expected due to lower FX gains, FCFE of $340mn still exceeded our estimates by 4% despite higher taxes paid, as capex saw a marked drop to $162mn ($273mn in 2Q18). 106% dividend payout for 3Q18. The company positively surprised on dividends,
118 RUSSIA Country Report December 2018 www.intellinews.com