Severstal - 4Q20 Trading Update Mixed; Earnings Preview

Severstal's 4Q20 trading update showed lower than expected steel sales volumes, while the company's average realized price massively lagged the export HRC benchmark amid low export sales. We expect just moderate 7% Q-o-Q growth in 4Q20 EBITDA to $700 mln and weakish FCF of $180 mln, for a 1.2% yield. Meanwhile, the dividend should be a solid $350-400 mln, for a 2.5% yield. Severstal will report its 4Q20 IFRS results on February 4. Looking forward, we think it should reap the effects of the recent steel price rally in 1H21 and note that the stock is trading at an undemanding 21% 2021E FCF yield at spot steel and bulk prices. We calculate that it would take a 28-30% drop in Severstal's steel price basket for the stock to trade at a historically normal 10-11% FCF yield at its current market cap; however, we expect a much lower correction in steel prices in 2021 and reiterate our BUY recommendation.> Steel sales volumes slightly below expectations. Steel production volumes declined 4% Q-o-Q to 2.77 mln tonnes, which is attributable to basic oxygen furnace maintenance. Steel product sales dropped 18% Q-o-Q from the high base of 3Q20 to 2.46 mln tonnes. The decline reflected lower production and low steel inventories, although sales were still 5% below our expectations because Severstal shifted an additional 200-300 kt of steel products to exports, which were in transit as of end-4Q20 and which will be recognized in 1Q21 sales.> Positive impact from higher HVA share offset by high domestic sales. The share of HVA increased 4 pp Q-o-Q to 53%, which is positive for the average realized price. However, the share of domestic sales increased 2 pp Q-o-Q to 65%, while during 4Q20, domestic steel price dynamics lagged those of exports, and there was no domestic premium. As a result, Severstal's average realized price grew just 8% Q-o-Q to $551/tonne, underperforming the export HRC benchmark (up 22% Q-o-Q with a two-month lag).> Good iron ore volumes; Yakovlevsky ramp-up still slow. Iron ore concentrate sales volumes dropped 11% Q-o-Q in 4Q20 to 1.74 mln tonnes on lower production at Karelsky Okatysh. This was fully offset by 8% higher Q-o-Q pellet volumes (2.83 mln tonnes), so total iron ore production was almost unchanged Q-o-Q. Production at the Yakovlevsky mine, Severstal's growth project, jumped 20% Q-o-Q to 504 kt, but the full-year figure of 1.82 mln tonnes was still below the production guidance of 2.0 mln tonnes (this guidance had been revised downward three months ago from 2.2 mln tonnes).> Earnings growth in 4Q20 to be slow on low export sales volumes. We expect revenues to decline 9% Q-o-Q to $1.7 bln on lower sales volumes. EBITDA in 4Q20 should grow just 7% Q-o-Q to $700 mln, while FCF will likely be pressured by a working capital build-up and seasonally elevated capex. We expect Severstal's FCF to drop 50% Q-o-Q to $180 mln for a 1.2% yield. Adjusted for the excess capex, we expect a strong 4Q20 dividend payment of $350-400 mln for a 2.5% yield so that the full-year payment matches 100% of FCF plus excess capex (in 9m20, Severstal paid out dividends equivalent to just 90% of its FCF).