Evraz - 4Q19 Trading Update Suggests Weak 2H19 Earnings

As we had expected, today Evraz reported a weak 4Q19 trading update. We expect its 2H19 EBITDA to contract almost 30% H-o-H to $1.05 bln and see the yield for the 2H19 dividend slightly above 3.5%. At spot steel and bulks prices and the current USD/RUB, Evraz is trading at a 2020E EV/EBITDA of 5.6, LFCF yield of 5-9% (assuming $0.7-1.0 bln in capex) and yield on dividends to be paid in 2020 of 5-6% (assuming a 70% payout from LFCF), below the 10-12% yields offered by Russian flat steel producers. The 2H19 IFRS results will be disclosed on February 27.> Steel revenues almost flat Q-o-Q on higher volumes, realized price resilient. Steel product sales from the Russian division grew 8% Q-o-Q to 3.07 mln tonnes in 4Q19 thanks to a 19% jump in semis sales to 1.67 mln tonnes. Meanwhile, finished steel sales dropped 3% Q-o-Q. Thus, the product mix deteriorated with the share of semis sales in the Russian division's mix growing 5 pp Q-o-Q to 54%. On the positive side, Evraz completed maintenance at its rail and beam mill at ZSMK in Russia and increased sales of high-margin railway products by 18% Q-o-Q to 370 kt, while the realized price on railway products was up 12% Q-o-Q. This supported the Russian steel division's average realized price, partially offsetting weak pricing for semis and construction products (both down more than 12% Q-o-Q) and the lower share of finished steel sales. Overall, the average realized price was down just 7.5% Q-o-Q, which was still better than the realized prices for Russian flat steel producers. This kept revenues almost flat Q-o-Q (as volumes were up 8% Q-o-Q). At the US division, steel product sales were flattish Q-o-Q at 0.54 mln tonnes, with the average realized price down just 1% Q-o-Q thanks to resilient tube pricing. > Drop in coking coal concentrate sales on weak demand from China. In 4Q19, Evraz conducted a scheduled longwall move at Raspadskaya, so ROM coal output volumes were down 5% Q-o-Q to 6.0 mln tonnes. This brought the full-year figure to 26 mln tonnes, in line with the 2019 guidance. Coking coal concentrate external sales were down 10% Q-o-Q to 2.0 mln tonnes, as China exhausted its annual import quota in early November and then restricted imports until year-end. On the 3Q19 trading update call, Evraz had guided that 2020 ROM coal output could be down y-o-y to around 25 mln tonnes due to potential Chinese import restrictions. > Weak set of 2H19 financial results ahead. Evraz's commodity basket had a weak performance in 2H19, with realized steel prices for the Russian division down some 5% H-o-H (15% at the US division), the coking coal price down 20-25% H-o-H and FeV price down more than 50% H-o-H. At the same time, reported slab and coking coal cash costs in Russia increased by 5-6% H-o-H. We expect Evraz's 2H19 EBITDA to contract around 30% H-o-H to $1.05 bln, while LFCF could drop almost 50% H-o-H to around $370 mln, for a 5% yield. If Evraz continues paying around 70% of its LFCF in dividends (as it did for 2H18 and 1H19), the 2H19 dividend could total around $250 mln for a 3.6% yield.