Page 127 - RusRPTMay19

2,843 kt in 1Q19, which reflected a slight pickup in production volumes following the completion of blast furnace maintenance in the fourth quarter of 2018. The share of HVA products remained flat q/q at 44%. Severstal's average realized prices declined 3-6% q/q, in line with domestic and export HRC benchmarks, which were down 2-8% q/q. Iron ore pellet sales declined 4% q/q to 2.83mn tonnes due to seasonally lower production volumes in 1Q19 and also to inventory sales in the fourth quarter of 2018. Coking coal concentrate sales eased 1% q/q due to longwall repositioning at several Vorkutaugol mines, but they were up 64% y/y. We therefore see no downside risk to the guided 20% increase in coal sales volumes this year. With lower steel prices and pellet sales volumes on one hand but higher steel sales volumes on the other, analysts expect revenues to have declined only slightly, to around $2.05bn q/q. However, we expect the EBITDA margin to have fallen to 32% (-6 pp q/q), owing to the decrease in steel prices and lower sales volumes of pellets, which are a high-margin product. Despite a peak in capex guided for this year (total of $1.4bn), analysts think that capex in 1Q19 should be fairly low, as spending is usually skewed toward the end of the year. In addition, a working capital release due to the lower steel prices should further support FCF. We estimate that Severstal generated around $400mn in leveraged FCF for the quarter, for a 3% yield. The 1Q19 dividend payout should be 100% of FCF or slightly higher, at $400-450mn, for a 3% yield.
Russian steel major Severstal plans to considerably increase the share of its internet sales in Russia and CIS to 60% of total by 2023, Vedomosti daily reported on April 23 citing the head of company’s e-commerce unit Victor Romanovsky. After only three years from the launch, in 2018 Severstal doubled its online sales in the region to about 2.5mn tonnes or about 30% of total sales. The company now plans to double that again by 2030. Online sales are focused on b2b distribution to SMEs, but Severstal plans to adjust its online sales system for large clients as well. Costs on IT and digitization soared four-fold in the last four years to about 7% of total capex, and will continue to increase by 20-25% annually, the company estimates. In 2019 total capex is planned at $1.4bn, with $98mn to be spent on digital projects, Vedomosti estimates, eventually reaching about $200mn annually. Analysts surveyed by the daily welcome higher digitization in the segment, reminding that 77% of steel consumption accounts for the construction sector, which would also benefit from lower costs and greater transparency. Other metals majors such as NLMK, MMK, OMK, ChtPz, and TMK pipemaker also operate online trading platforms and sales solutions.
Steel mill Severstal’s results and 2Q19 guidance came out mostly in line with BCS GM estimates. Severstal released mostly neutral 1Q19 IFRS results, which just slightly missed our estimates on EBITDA, net income and FCF. Revenue declined 3% q/q and 7% y/y to $2.03bn, on the back of declining steel prices offsetting steel sales – 1% above our estimates. EBITDA fell 16% q/q to $663mn and 6% y/y, due to lower top line and weaker margin (down 5ppts q/q) – 3% miss v BCSe. Decrease y/y is motivated by lower revenues offset by lower COG’s, resulting in almost flat EBITDA margin year- on-year. NI declined 26% q/q and 7% y/y to $428mn, partially driven by losses from the remeasurement of financial instruments and lower profit before taxes – 4% below our estimates. CapEx declined 5% q/q to $204mn, <15% run rate v $1.4bn guidance for 2019. Free cash flow (FCF) rose 67% q/q and 35% y/y – on the back of working capital release – 3% weaker v BCS. Dividend payout ratio was 113%. The company gave mostly positive outlook for 2Q19, expecting its financial results to be positively affected by seasonal construction recovery in China and Russia, paired with the effect of higher iron ore prices in
127 RUSSIA Country Report May 2019 www.intellinews.com