NLMK - 1Q20 Trading Update: Strong Volumes, Weak Mix; IFRS Preview

NLMK has reported its 1Q20 trading update, showing a strong uptick in sales volumes and a moderate deterioration in the sales mix. We think that it should post the strongest 1Q20 financial performance among Russian flat steel producers, with an FCF yield of almost 2%. The IFRS results are due on April 30.> Volumes up Q-o-Q on higher semis and HVA sales. Consolidated steel product sales rose 8% Q-o-Q on higher sales of semis from the Russian flat division (driven by higher production, as blast furnace maintenance was completed) and higher HVA product sales. The share of finished steel in consolidated sales fell 5 pp Q-o-Q to 61%, while the HVA share in total sales was 30%, flat Q-o-Q. The geographical sales mix was unchanged Q-o-Q for the Russia flat division, with domestic sales (a premium market for Russian steel producers) taking up a 39% share. > Strong performance at European and US divisions. The Russian long division posted a 16% Q-o-Q drop in sales volumes on seasonally low construction activity in Russia. The US division and DanSteel showed increases in sales volumes of 14% and 25% Q-o-Q. Interestingly, sales volumes from NBH (NLMK's European rerolling subsidiary, not consolidated) were up 17% Q-o-Q despite the lockdown measures in Europe and temporary closure of the Verona plant at the end of March.> We estimate average realized price fell 3-4% Q-o-Q. NLMK does not report its average realized prices in the trading update, though we estimate that it dropped 3-4% Q-o-Q. This is better than Severstal's reported realized price performance (-6% Q-o-Q) but worse than MMK's (+2% Q-o-Q).> 1Q20 financials to be strongest among Russian peers. Thanks to the good sales volume growth, we expect NLMK's top line to grow 5% Q-o-Q to $2.4 bln. Meanwhile, the weaker ruble and lower coking coal prices should help on the cost side, so we expect $600 mln in EBITDA, up 25% Q-o-Q. We believe that, like Severstal, NLMK was focused on meeting its initial capex targets in 1Q20 and might have spent some $250-300 mln. We estimate FCF at around $180 mln, for a 1.8% yield, above that of MMK and NLMK (each below 1%, we estimate). We think NLMK will pay out 100% of its FCF in dividends for 1Q20 as per the dividend policy.> No outlook disclosed; 2Q20 should be weak. Like Severstal, NLMK has not provided any outlook for 2Q20. Despite the widespread lockdown measures in Europe, for now we believe that NLMK might face only limited volume problems. It did not halt production at its plants in Belgium and Denmark, while it is well positioned to export steel to Southeastern Asia, though at a reduced netback (see our comment on Severstal). However, in Russia there might be some downside in the sales volumes for 2Q20 (especially for the long division) due to the lockdowns and economic weakness. Because steel prices remain depressed and volumes are at risk, we believe that NLMK (like MMK and Severstal) could post close to zero or even negative FCF for 2Q20 and probably skip the dividend for 2Q20, if the outlook remains weak.