MMK - 4Q17 Trading Update Suggests Decent Earnings

> MMK has released a trading update for 4Q17. Total finished steel product sales fell 12.5% Q-o-Q to 2.8 mln tonnes, mainly due to seasonally weak domestic demand in Russia and a high base from 3Q17, when the company was selling down stocks. The share of HVA products in sales retreated slightly but remained around the 45% level. Shipments from the core MMK Russia operations dropped 9.9% Q-o-Q, but this was counterbalanced by an 11% Q-o-Q rise in the average selling price to $616/tonne. Importantly, MMK continued to increase pig iron production, which reached 2.7 mln tonnes in 4Q17 (up 3.7% Q-o-Q), allowing the company to increase the share of pig iron in its furnace charge and lower its cash costs.
> Based on these operating results, we project 4Q17 headline EBITDA (i.e. unadjusted for social expenses) at around $530 mln, which would be almost flat y-o-y. This should bring full-year headline EBITDA to $1,970 mln, or around $1,900 mln adjusted for social expenses; both numbers are above our forecast and the Bloomberg consensus of $1,870 mln.
> We estimate that the company generated around $100 mln in leveraged FCF in 4Q17; however, we expect dividends of at least $150 mln, bringing the 2017 dividend yield to 6-7%. MMK will report its 2017 financials on February 6 or 7.
> Regarding 1Q18, MMK warned that seasonality and maintenance could impact its performance but that this should be balanced out by higher selling prices for finished products both on the export and domestic markets. Marked to market, we expect slight earnings growth in 2018, meaning that MMK, which is focused primarily on the Russian market, may materially lag behind NLMK and Severstal. A key reason for this underperformance could be its relatively low level of vertical integration, along with a general y-o-y decline in domestic premiums over export netbacks.