MMK - 4Q19 Trading Update Weak, but Strong Quarterly Dividend to Come

MMK has reported a 4Q19 trading update showing a Q-o-Q contraction in sales volumes (like Severstal) and a deterioration in the product mix (like NLMK). We thus expect its EBITDA to contract 36% Q-o-Q, underperforming peers. However, thanks to a working capital release, 4Q19 FCF should come in at around a solid $215 mln, for a 2.5% yield. Given that MMK has recently started paying out more than 100% of FCF, we expect a strong 4Q19 dividend of up to $300 mln, for a yield of up to 3.5%, which would be the strongest among Russian flat steel producers. At spot steel and bulks prices and the current USD/RUB, MMK is trading at a 2020E EV/EBITDA of 4.7 and yield on dividends to be paid in 2020 of 10%.> Sales volumes seasonally down, product mix deteriorates. Consolidated steel product sales declined 4% Q-o-Q to 2.78 mln tonnes, mainly due to a 9% drop in HVA sales. As a result, the share of HVA in total sales fell 2 pp Q-o-Q to 47%. Domestic sales from the Magnitogorsk site fell 11% Q-o-Q to 2.27 mln tonnes, so the share of domestic sales (where there is a premium to the export netback) declined 7 pp Q-o-Q to 84%, which is still above the five-year average of 77%. As the product mix worsened, MMK's average realized price fell 13% Q-o-Q, underperforming Severstal but broadly in line with NLMK, we estimate.> Coal concentrate output up Q-o-Q, but still below full capacity. Coking coal concentrate production was 721 kt in 4Q19, up 15% Q-o-Q (almost fully produced from MMK's own run-of-mine coal). The company's target for 2020-23 is to produce 3.2 mln tonnes of coking coal concentrate annually from its own ROM coal (800 kt per quarter on average), so the 4Q19 performance was still below this target.> Weak set of financials to come, but FCF and dividends should be good. We expect EBITDA to contract 36% Q-o-Q to $335 mln, underperforming the Q-o-Q dynamics of Severstal and NLMK. However, we expect FCF, which should be supported by a working capital release, to come in at around $215 mln, for a 2.5% yield. Given that MMK recently adjusted its dividend formula, now adding any excess capex above $700 mln to annual adjusted FCF (the dividend base), we expect a generous 4Q19 dividend of up to $300 mln, for a 3.5% yield, above that of Severstal and NLMK, according to our estimates (2.6% and 2.2%, respectively).