MMK: Solid results, but no dividend hike (upgraded to BUY)

In this report, we update our macro assumptions and adjust our model for the 3Q16 results, which results in 3-9% increases in our 2017-19E EBITDA forecasts. We also roll forward the period we use in determining our price target (PT), so the net result is a 20% increase in our PT to USD 7.9/GDR, and we upgrade MMK from Hold to BUY. MMK’s discount vs. its peers has widened since we last published (in September 2016), and it trades at a discount to its longer-term average EV/EBITDA ratio. It has also underperformed its more integrated Russian peers since August, due to rising coal and iron ore prices, as well as NLMK and Severstal raising their dividend expectations following their 3Q16 financial results. We understand this discount as MMK remains cautious on raising its dividend (paying only 30% of FCF, 3.9% dividend yields in 2017/18E vs. SVST and NLMK on 7-9%), despite its clean balance sheet (0.11x ND/LTM EBITDA). Management now wants to reduce debt by a further USD 300m and increase cash by over USD 300m (to USD 500m) before committing to a higher dividend policy. This should happen next year in the absence of other spending commitments, in our view, and we expect MMK to rerate then. It is likely to continue to trade at current multiples until late-2017E, in our view. However, our PT assumes that MMK trades in line with its five-year average of 4.1x EV/EBITDA vs. 3.3x/3.0x in 2017/18E. Even without an increased dividend (and without assuming a much higher EV/EBITDA rating), MMK’s level of FCF generation should reduce the net debt significantly and result in an uplift in equity value, in our view.