MMK - 1Q20 Trading Update Good on Mix; 1Q20 IFRS Preview

MMK's 1Q20 trading update showed a moderate decline in volumes amid maintenance and higher prices on a better sales mix. We expect EBITDA jumped 27% Q-o-Q to $425 mln, though FCF should be pressured by a working capital buildup and could come in below $50 mln. MMK will report its 2Q20 IFRS results on April 29.> Steel product sales lower on maintenance; sales mix good. Consolidated sales of steel products decreased 1% Q-o-Q as MMK started maintenance at its HRC mill 2500 in March. Unlike Severstal, its sales mix slightly improved: the share of HVA in consolidated sales rose 1 pp Q-o-Q to 48%. The better sales mix pushed the average realized price up 2% Q-o-Q, versus a 6% decline for Severstal. > Coking coal concentrate production finally at full capacity. Coking coal concentrate output grew 13% Q-o-Q to 814 kt. MMK's mid-term guidance is 3.2 mln tonnes per annum, so 1Q20 output represented roughly 25% of the full-year target, meaning that, after maintenance and upgrades last year, the plant finally reached full capacity.> FCF in 1Q20 pressured by working capital buildup. Because the lower sales will be fully offset by a higher average realized price, we expect MMK's revenues to slightly increase Q-o-Q. Meanwhile, lower coking coal prices and the weaker ruble should help on the cost side. We expect MMK's EBITDA to increase 27% Q-o-Q to $425 mln. In 4Q19, it managed to significantly reduce working capital below normal levels, so working capital will likely build up in 1Q20. We expect FCF to be just $40 mln, for a 0.7% yield, and expect a dividend for 1Q20 of around $50 mln, for a 0.8% yield. > MMK sees risk of volumes declining in 2Q20. In its market outlook, the company said that there was a risk of a volume decline in 2Q20 due to the coronavirus lockdowns, while prices should continue to be pressured. MMK plans to continue upgrading its HRC mill 2500 during 2Q20, which will entail a planned decline in output. MMK's geographical mix is skewed to the domestic market. In Russia, as in the EU, utilization rates for automobile production were reduced in late March and early April. Construction activity is likely to be affected by the general economic slowdown and quarantines too. We thus think that the company might face a decline in domestic sales and might be seeking to export more to Southeast Asia (which would negatively affect its netbacks). We estimate the domestic EXW price at $400/tonne HRC and FOB Black Sea at $330-360/tonne, depending on the final destination. We see the risk of MMK posting negative FCF in 2Q20 and think it will probably skip dividends for 2Q20 in this case.