Russian Flat Steel Producers - Upgrade TPs and Reiterate BUY

In the past six weeks, the stock prices of Russian flat steel producers have lagged Russian export flat steel prices, which jumped more than 30%. NLMK, Severstal and MMK are trading at undemanding valuations at spot commodity prices and the current USD/RUB rate, and we think that all three should beat Bloomberg consensus earnings estimates for 4Q20-1H21. We raise our target prices for all three companies and reiterate our BUY recommendations.> Since mid-October (when we upgraded flat steel producers to BUY), Russian export flat steel prices have risen over 30%. The price rally was spurred by strong demand and growing prices in Asia amid strong stimulus-driven demand in China and a manufacturing recovery in India. Moreover, the high effectiveness of Covid vaccines in trials boosted hopes for a rapid global economic recovery in 2021 and resulted in tight steel market balance in DMs. This was particularly the case in Europe, which experienced only mild consequences of lockdowns this fall and the industrial output of which is on a strong recovery path. The Russian export HRC price jumped to $645/tonne FOB Black Sea, while the export slab price rose to $538/tonne FOB Black Sea. As a result, our annualized EBITDA estimates at spot steel and bulks prices and spot USD/RUB increase by 50-100% across flat producers. > As stimulus measures are likely to be rolled over into 2021, we believe that relatively high prices may remain in place in 1Q21. Meanwhile in Russia, domestic prices were slow to grow, but last week Metal Expert reported that Severstal is increasing its January domestic HRC price to R54,600/tonne CPT Moscow (roughly $605/tonne EXW ex-VAT), meaning that the discount of domestic price to the export netback which emerged in November has almost shrunk to zero. We expect the Russian domestic premium to increase to $50/tonne in the spring once domestic construction season kicks in. > We upgrade our EBITDA and dividend projections for 2020-21 for all steel producers. At our quite conservative base-case price deck (HRC FOB Black Sea at $525/tonne, which is 19% below spot), we see 11-25% upside to the current 2021 Bloomberg consensus EBITDA for NLMK, MMK and Severstal. > If steel prices hold at current levels for longer, upside versus the consensus could exceed 50%. Importantly, NLMK could have the highest upside due to a combination of high export steel prices (exports dominate in total sales) and low coking coal prices (which the company is short). In our base case, which is more conservative with respect to the export prices but assumes a $50/tonne domestic premium, MMK has the highest upside due to its high exposure to domestic market and long transport leg to export ports.> At current prices and the spot USD/RUB rate, NLMK, MMK and Severstal can all generate 18-21% yields on dividends to be paid in 2021. These are the highest in the sector if earnings are marked to market. In our base case (steel prices 10-20% below spot), the stocks are trading at 11-13%, versus normalized historical average dividend yields of 10%. We increase our target prices and reiterate our BUY recommendations.