Alrosa - 4Q19 Trading Update Strong on Better Sales Mix

Alrosa has reported its 4Q19 trading update, showing a strong uptick in the average realized price coupled with a decline in the like-for-like price index, which indicates a significant improvement in the sales mix. We expect 4Q19 EBITDA to come in at $440 mln, almost 40% ahead of the current Bloomberg consensus, though the 2H19 dividend payment should be moderate, yielding just 2.0-2.5% due to the weak 3Q19 results. We remain cautious on the stock due to long-term structural factors, including the threat posed by LGDs and the loss of brand appeal for diamonds, as we highlighted in our recent report. At the spot USD/RUB rate and given our assumptions for Alrosa's prices and sales volumes, the stock is trading at a demanding 2020E EV/EBITDA of 7.1 and 9% LFCF yield.> Full-year diamond production in line with guidance. Diamond production in 4Q19 dropped 15% y-o-y to 8.8 mln cts due to lower processing volumes at Jubilee and International (the Aikhal and Mirny divisions), as well as lower average grades at Jubilee. Full-year production was 38.5 mln cts, up 5% y-o-y and in line with the guidance given for the Verkhne-Munskoe ramp-up.> Average realized price beats expectations. Diamond sales were 8.2 mln cts in 4Q19, which brought the full-year figure to 33.4 mln cts, marginally above the 32-33 mln cts guidance. The average realized gem-quality price in 4Q19 was $148/ct, up 9% Q-o-Q and 15% above the average for 9m19. As the like-for-like diamond price index decreased 2% Q-o-Q in 4Q19 (the index fell 9.1% in 2019), the higher average realized price was due to a massive improvement in the sales mix, with higher sales of bigger and/or more expensive diamonds. The share of gem-quality diamonds in 4Q19 was 73% (above our assumption of 70%), so the average realized price for the whole sales mix improved 15% Q-o-Q to $108.5/ct. As to our expectation of the mix improvement, in our recent report we noted that the demand and pricing for bigger stones should be more resilient and Alrosa will try to sell more of its expensive stones. Likely, it had such an opportunity due to high accumulated stocks levels with a strong product mix after it sold predominantly cheaper diamonds in 9m19. Nevertheless, the magnitude of the realized price improvement in 4Q19 exceeded our forecast.> 4Q19 financials to be strong, 2H19 dividend yield above 2%. Based on the strong reported realized price, we expect quite a decent set of 4Q19 results. We see EBITDA of $440 mln for the quarter, for a 46% margin (almost 40% above the $320 mln implied by the full-year Bloomberg consensus), while we expect FCF to come in at $200 mln, for a 2% yield. This would bring 2H19 FCF to $240 mln, for a 2.3% yield. Net debt/EBITDA as of end-2019 should be around 0.7, which should trigger a 70-100% payout from FCF and a 2H19 dividend of up to $240 mln (a payout of 50% of 2H19 net income, Alrosa's guided dividend floor, would be about the same).