Severstal - 4Q19 Trading Update Weak, but the Dividend Should Be Resilient

Severstal has reported a 4Q19 trading update that was weak on steel volumes and prices, as we expected. We forecast 4Q19 EBITDA to drop 23% Q-o-Q to $605 mln, while FCF should come in at just $100 mln for a yield of just 0.8%, pressured by higher capex. However, we think the dividend should remain in line with the pretty good 3Q19 level, coming in at $350 mln for a 2.6% yield thanks to Severstal's dividend formula, which stipulates a dividend payout of more than 100% of headline LFCF. At spot steel and bulks prices and the current USD/RUB rate, Severstal trades at a 9.5% dividend yield to be paid in 2020.> Steel sales volumes and prices down, geographical mix worsens. Consolidated steel product sales declined 6% Q-o-Q in 4Q19 to 2.65 mln tonnes. The share of sales to the premium domestic market dropped 8 pp Q-o-Q to 59% on the back of seasonally low domestic demand. Despite the higher share of exports, Severstal managed to keep the share of HVA flat Q-o-Q at 45% (domestic HVA shipments usually account 75-80% of total HVA sales, so a decline in domestic sales usually pressures the share of HVA). The average realized steel product price declined 10% Q-o-Q, in line with Russian export HRC and CRC benchmarks.> Full-year saleable bulks output in line with guidance. Full-year sales of iron ore concentrate, pellets and coking coal concentrate came in at a respective 6.3, 11.0 and 4.7 mln tonnes and were almost in line with guidance. Consolidated pellet sales jumped 32% Q-o-Q in 4Q19 to 1.8 mln tonnes on higher production and an inventory release.> 4Q19 financials are set to be weak, but the dividend yield could be 2.6%. Weak steel sales and prices and 1.5% ruble appreciation Q-o-Q should pressure profitability in 4Q19. We expect EBITDA to drop 23% Q-o-Q to $605 mln for a 33% margin. Leveraged FCF should come in at just $100 mln (down 70% Q-o-Q) on the back of lower earnings and a seasonal capex increase. However, we think the 4Q19 dividend should remain solid at around $350 mln for a healthy 2.6% yield (flat Q-o-Q), as Severstal's full-year adjusted FCF should come in at around $1.5 bln ($1.1 bln in FCF and $400 mln in adjustments for capex being above $800 mln) and the company paid $1.15 bln in dividends for 9m19.