MMK - Production and Sales Pick Up in 3Q20; Earnings Preview

MMK has reported a healthy 3Q20 trading update, showing a nice pickup in steel production and sales. We expect EBITDA to have risen 50% Q-o-Q in 3Q20 to $340 mln, while FCF should come in at a strong $185 mln, for a 3.6% yield. However, due to a seasonal slowdown in domestic demand, we don't see further upside to earnings in 4Q20 and thus see 10% downside to the 2H20 Bloomberg EBITDA consensus forecast. At spot commodity prices and the current USD/RUB, MMK is trading at a 2021E EV/EBITDA of 3.6, 7% FCF yield and a yield on dividends to be paid in 2021 of 10% (versus 12% for Severstal and NLMK). > Crude steel output recovered 22% Q-o-Q in 3Q20 to 2.9 mln tonnes, thanks to higher steel demand after the lockdown in Russia and the completion of overhauls to its blast furnace and HRC Mill 2500.> Sales of steel products jumped 23% Q-o-Q thanks to seasonal and post-lockdown pent-up demand from the domestic construction sector. Sales of HVA products rose 17% Q-o-Q, though their share in the total sales mix declined 3 pp Q-o-Q to 49%. Despite the slightly worse sales mix, the average realized steel product price climbed 2.5% Q-o-Q; the growth is in line with the reported figure for Severstal and our estimate for NLMK, both of which reported sales mix improvements. We think this is attributable to the company having started to shift sales from exports to the domestic market, which is more profitable for MMK given the high transport cost to ports. MMK will report its geographical sales mix with its 3Q20 IFRS results.> We expect MMK's EBITDA to jump 50% Q-o-Q from the depressed 2Q20 level to $340 mln, driven by higher sales volumes and slightly better average realized prices. FCF should be strong thanks to the better earnings and potential $100 mln working capital release due to a growing share of domestic deliveries. We expect 3Q20 FCF at $185 mln for a healthy 3.6% yield (yield is above our forecast for Severstal and NLMK). We think that MMK will pay out 100% of its FCF in dividends for 3Q20. It will report its 3Q20 IFRS results on October 22.> MMK expects domestic prices to stabilize around current levels in 4Q20, given that export prices have stopped rising, while the Russian construction season is winding down. Meanwhile, the domestic premium versus export netback is already low, thus supporting domestic steel prices. We expect flat EBITDA Q-o-Q in 4Q20, while FCF will likely be pressured by higher capex ($300 mln guided for 4Q20, versus our 3Q20 estimate of $200 mln) and a seasonal working capital buildup. Hence, we see 10% downside to the Bloomberg consensus for 2H20 EBITDA.