WOOD Flash – EVRAZ: Investor Day – unsurprising capex hike

EVRAZ held its 2018 Investor Day in London on Friday (19 October). The main news was the formal announcement of higher capex in the next few years. In 2019-22E, EVRAZ now expects capex to be in the range of USD 830-990m vs. USD 640-660m in 2018, an increase by c.30-50% p.a. over the next four years. We do not see this as a surprise, however, given recent interviews with EVRAZ’s management, in which it talked about similar increases in capex, and the pressure from the Russian government for M&M companies to spend more. Much of this spending is subject to the approval of the board on the new projects, so it is not yet confirmed, but such an increase would obviously reduce EVRAZ’s FCF, and hence dividend potential. The new projects should all have IRRs of c.20% or more, according to management’s estimates, but they are unlikely to improve EVRAZ’s valuation significantly, in our view, and we believe investors would favour higher dividends instead. On the positive side, management signalled that it wants to keep net debt below USD 4bn as a medium-term target and does not see further debt reduction as a priority. As net debt was USD 3.9bn at the end of June, this suggests to us that EVRAZ will pay out the majority of FCF as dividends going forward (as we assumed previously). On top of this, EVRAZ highlighted the vanadium price, which is currently c.3.5x the average in 2017. This could add up to c.USD 1bn to EBITDA on an annualised basis at spot, in our view. Overall, we believe the presentation should be neutral/a small negative for the share price, as we believe the capex hike was largely expected and it has not yet been signed off by the board.