NLMK - 4Q19 Trading Update: Financials to be Weak, but Dividend Resilient

NLMK has reported its 4Q19 trading update, showing a 4% Q-o-Q pickup in steel product sales volumes. However, Russian steel export benchmarks fell 11% Q-o-Q, while the share of both HVA products and Russian domestic sales in total sales declined, which likely pressured NLMK's realized prices in 4Q19. We expect EBITDA to drop 27% Q-o-Q to $475 mln in 4Q19 and for FCF to come in at around $180 mln, for a 1% yield. As NLMK is paying out more than 100% of its FCF in dividends, we expect the dividends for 4Q19 to be around $325 mln, for a 2.2% yield. At spot steel and bulk prices and the current USD/RUB rate, NLMK trades at a 2020E EV/EBITDA of 6.7 and an 8.5% dividend yield for dividends to be paid in 2020.> Steel output at NLMK's Russian flat division up Q-o-Q, in line with guidance. As guided, crude steel output at the flat division's Lipetsk site increased 6% Q-o-Q to 2.98 mln tonnes thanks to the completion of major repairs at its blast furnace in 4Q19. NLMK will continue the blast furnace repairs at Lipetsk this year, although its steel output guidance for 2020 is 3% above the 2019 full-year figure of 12.0 mln tonnes at 12.4 mln tonnes. > Steel sales up 4% Q-o-Q, but product mix worsens. Consolidated steel product sales grew 4% Q-o-Q to 4.2 mln tonnes due to 11% higher consolidated semi-finished steel sales volumes, as the Russian flat division increased its pig iron sales to third parties and slab sales to associated company NBH. As a result, the share of HVA in consolidated sales decreased 3 pp Q-o-Q in 4Q19 to 30%. Total sales from the Russian flat division (including intragroup sales) jumped 16% Q-o-Q, mainly on the back of higher exports of semi-finished products. Therefore, the share of sales from the Russian flat division to the domestic market - where there is a premium - dropped 4 pp Q-o-Q to 39% (despite a 7% Q-o-Q rise in domestic sales volumes in absolute terms). We think that the lower share of both HVA sales and Russian domestic sales likely put pressure on NLMK's realized prices, which might have underperformed the Russian HRC and slab export benchmarks, which both dropped 11% Q-o-Q in 4Q19 (we assume a two-month price lag for NLMK).> We expect weak 4Q19 financials, but the dividend should be solid. The weak steel benchmark performance, the worsening sales mix and the ruble's appreciation in 4Q19 should put pressure on NLMK's profitability. We expect EBITDA to contract 27% Q-o-Q to $475 mln in the quarter. On the positive side, higher sales volumes and lower prices should trigger a working capital release, so we expect FCF to come in at $180 mln, for a 1.1% yield. As NLMK pays full-year dividends based on LFCF adjusted for the difference in actual capex and $700 mln (this should add around $300 mln to the base on top of actual FCF in 2019), the dividend for 4Q19 should come in at $325 mln, for a 2.2% yield (below our forecast for Severstal of 2.6%).