WOOD Flash – Severstal: Capital Markets Day – large capex hike, but neutral for the dividend and the share price

Severstal held its Capital Markets Day today (7 November). The company is increasing its capex spending significantly, with the goal of growing EBITDA by 10-15% p.a. between now and 2023E, with capex expected to be c.USD 1.4bn p.a. in 2019E and 2020E, before falling gradually to “normalised” levels of c.USD 750m p.a. from 2023E. The total quantified EBITDA effect between now and 2023E from these investments should be USD 794m, but the company expects to make further savings through efficiency, digitalisation and other factors to contribute to the 10-15% EBITDA CAGR mentioned. The capex increase was more than we expected. However, crucially, the dividend will remain linked to 100% FCF while the net debt/EBITDA remains below 1x, but the capex base used for the calculation will be only USD 0.8bn p.a., i.e., it excludes the short-term increase in growth capex, which will allow Severstal to maintain high dividend payments in the next few years (the 2018 yield is annualising close to 14% now). Even with this excess capex spending, we estimate that net debt will not significantly exceed USD 2.6bn by the end of 2023E, so the ND/EBITDA should remain below 1.0x, allowing Severstal to maintain the dividend at 100% of the FCF through the capital intensive period of growth. While higher capex is rarely welcomed in a market with limited growth prospects (Severstal expects a 1% p.a. CAGR in Russian steel demand by 2023E), we believe that a hike was anticipated, given the trends elsewhere in the sector, and the commitment to the dividend should reassure investors that returns for shareholders remain a priority for the company. Therefore, the announcement should be neutral for the share price, in our view.