WOOD Flash – Severstal: Capital Markets Day – higher capex, minimal changes in EBITDA gains

Today (7 November), Severstal hosted its 2019 Capital Markets Day. More details were given on the EBITDA gains targeted last year, but the 2020E capex will be higher than the previous guidance, at USD 1.7bn and it appears that the capex beyond 2020E will be higher for longer than we expected previously, with an average of USD 1.2bn p.a. in 2020-24E. Most projects remain on track, but a large proportion of the c.USD 2.1bn of EBITDA gains targeted between 2017 and 2023E (USD 1.4bn post 2019E) come from hard to model/quantify gains, which rely on faith in Severstal’s guidance. So far, the market has been reluctant to give Severstal credit for these gains, and the negative reaction to weaker near-term FCF and the potential for rapid growth in leverage at a time of weak prices will probably outweigh the long-term growth potential, in our view. The growth potential for Severstal is significant and the average IRR it calculates is 30% vs. the c.20% EVRAZ announced on its main projects. We believe this is likely to result in Severstal demonstrating higher growth than its peers on a five-year view. However, if capex spending is not reduced in response to the current low prices, we would expect the net debt/EBITDA to exceed 1x in the next couple of years, which would mean that the dividend payout would fall to “no less than 50% of net income”. On this basis, using the current spot prices, the yield would be close to 4%, in our view. Overall, we see Severstal’s Capital Markets Day as negative for the stock.