WOOD Flash – NLMK: 1Q19 results - marginally below consensus but strong growth in FCF with a 4.1% quarterly dividend

NLMK has published its 1Q19 financial results, with EBITDA of USD 695m, 3% below the Interfax consensus of USD 714m, and down 18% qoq. FCF rose 35% qoq to USD 678m, however, due to a USD 262m release in working capital, allowing NLMK to recommend a dividend of RUB 7.34/share, based on a 100% payout of FCF. This represents a c.4.1% quarterly yield based on the GDR price, better than the c.3.4% yield announced by Severstal for 1Q19. Overall, we see the results as neutral, but the dividend news should be seen as positive in our view.
We currently see downside to our NLMK price target, but steel prices have exceeded our expectations so far in 2019, which justifies this premium, in our view. The c.4% quarterly reported dividend yield is unlikely to be maintained in the following quarters of 2019E, however, as FCF is likely to suffer a reversal of the large release seen in 1Q19, and guidance suggests that capex will increase in the next few quarters. We are relatively bearish on steel and raw material prices for the remainder of 2019E. Furthermore, blast furnace and converter overhauls will have a negative impact on volumes for the rest of the year, so 1Q19 is likely to be the high point for FCF in our view. Therefore, we see this as an opportune time to take profits in NLMK. The benefits of the strategy for the next five years, announced in March will take time to materialise, and we see the stock as fully valued.