Severstal - Soft Steel Market Caps Upside
In our February trade ideas report, we highlighted Severstal as our preference in the Russian steel sector thanks to its exposure to iron ore. While iron ore prices staged an impressive rally on supply disruptions in Brazil and Australia, growth in steel prices has lagged amid soft global demand and lower than expected capacity cuts in China. Iron ore pellet prices have underperformed the concentrate benchmark, as Chinese steelmakers have been switching to lower-quality feedstock to improve their margins. Having lowered our pellet price forecast for this year, we slightly cut our EBITDA projection for Severstal and lower our target price 5% to $18.60/GDR. We downgrade our recommendation from BUY to HOLD.
PAO Severstal is an integrated Iron & Steel works company with a range of products: hot and cold rolled steel, roll-formed shapes and pipes, rolled sections, a large group of coke products and by-products. Co. also has various social responsibilities such as the operation and maintenance of sports complexes, holiday and recreational facilities and public housing. Co.'s operations are organized along three principal divisions: Severstal Russian Steel engaged in crude steel production; Severstal Resources engaged in the production of iron ore concentrate, pellets and coking coal; and Severstal International engaged in the production of high-quality flat-rolled products.
Sberbank CIB Investment Research is a research firm offering equity, fixed income, economics, and strategy research. It covers analysis on all aspects of Russia’s capital markets, issues and industries. The firm analyzes trends in Russia and combines local knowledge with a global perspective. It processes macroeconomic data, market and company-specific news, stock quotes and other information for providing research reports. The firm provides details and latest prices on the most traded names and most traded paper on all segments Russian market. In strategy research, it provides thematic research, tips and descriptions of the methodology used to evaluate companies.
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