NLMK - 3Q20 IFRS Strong on FCF; Upgraded to BUY

NLMK has reported 3Q20 IFRS results that were in line with our EBITDA estimate and 40% ahead of our FCF projection (on a bigger working capital release). We have updated our 2020 financial forecasts, with our upgraded 2020 EBITDA projection now almost in line with the Bloomberg consensus. At spot steel prices and the current USD/RUB, we now see 17% upside to our 2021 EBITDA forecast and more than 20% upside to the consensus on 2021 EBITDA, as spot export prices are relatively high (spot slab at $435/tonne FOB Black Sea versus our 2021 average forecast of $400/tonne) and the ruble is weak. We raise our target price to $25.00 per GDR based on a weighted average between our base case and spot analysis for 2021. We estimate the total return over the next 12 months at 25%. We upgrade the stock to BUY.> Revenues rose 3% Q-o-Q to $2.23 bln on 2% higher consolidated sales volumes and a 2% higher average realized price at the Russian flat steel division, driven by a better sales mix. EBITDA for the quarter came in at $579 mln (flat Q-o-Q), 4% below the consensus but in line with our estimate. Despite the revenue growth and slightly weaker ruble Q-o-Q, EBITDA was pressured by the accident at the Stoilensky iron ore asset, which cost the company $60 mln (slightly above our estimate of $50 mln). (Stoilensky was relaunched on September 23 and is now running at full capacity.) EBITDA gains from executing on the company's strategy were reported at $55 mln in 3Q20, which brought the 9m20 total to $170 mln. The latter figure includes $124 mln from operating efficiency gains (above the full-year guidance of $100 mln) and $46 mln in gains from investment projects. In 3Q20, the consolidated cash cost of slab was the lowest since 2016 at just $194/tonne, down 3% Q-o-Q.> LFCF decreased 21% Q-o-Q to $239 mln, but was still 40% above our expectations because of a higher than expected working capital release of $98 mln. Capex in 3Q20 was $344 mln (slightly above our estimate), which brought the 9m20 figure to $851 mln, 77-85% of the reiterated full-year guidance of $1.0-1.1 bln. We think the full-year capex figure will be in the guided range, as capex this year was skewed to 3Q20, owing to maintenance of the blast furnace and basic oxygen furnace operations at the Lipetsk site. On the conference call, NLMK indicated that its 2021 capex will likely be flat y-o-y (at $1.0-1.1 bln) due to the rollover of some projects into the next year and the start of the active phase of captive power plant construction. We increase our 2021 capex projection 15% to $1.1 bln.> The BoD recommended a 3Q20 dividend of R6.43 per share, or $500 mln in total, for a 3.8% yield. This includes the regular payment for 3Q20, as stipulated by the dividend policy, in the amount of $250 mln, which was in line with our estimate. NLMK will also pay out $250 mln to compensate for low dividends in 4Q19. NLMK previously guided that it would make up for the weak 4Q19 dividend if market conditions improved, but it did not provide the exact timing for this.> In 3Q20, NLMK provided a $51 mln loan to its non-consolidated foreign re-rolling joint venture NBH. Since 2017, NLMK has injected around $630 mln into NBH via equity investment and loans. > We have updated our 2020 financial forecasts, accounting for the recent pickup in export steel prices, correction in coal and, importantly, sharp ruble depreciation. Our full-year EBITDA projection of $2.35 bln is now in line with the current Bloomberg consensus. Based on NLMK's dividend policy to pay 100% of FCF for the year plus capex in excess of $700 mln, we forecast the remaining dividend for 2020 (for 4Q20) at $400-450 mln, assuming there will be compensation for the lower dividend for 1Q20. As for next year, we reiterate our commodity price assumptions, update our estimated USD/RUB rate in line with the current view of our economists and leave our financial forecasts almost unchanged. Our base-case 2021 EBITDA projection of $2.7 bln is 4% above the current Bloomberg consensus. However, at spot commodity prices (higher than our base case with the spot slab price at $435/tonne FOB Black Sea versus our 2021 average forecast of $400/tonne) and the current USD/RUB (77 versus our macro team's forecast of 68), NLMK could generate $3.15 bln in EBITDA next year, providing 17% upside to our base-case estimate. In this marked-to-market scenario, the stock is trading at an undemanding 2021E EV/EBITDA of 4.8, a 10% FCF yield and a yield on dividends to be paid out next year of 13%. > Using a scenario-based valuation with an equal weighting for our base and spot cases, we raise our target price to $25.00 per GDR. This implies 13% upside and a 25% total return over the next 12 months. We upgrade the stock to BUY.