strong dividend and 2022E Strategy plans for growth offset neutral 4Q16 results

This morning, NLMK reported its 4Q16 financial results, announced a strong 4Q16 dividend and presented its Capital Markets Day (CMD), including ‎an update on its strategy up to 2022. The 4Q dividend was announced at RUB 3.38/share (USD 347m in total), 191% of the 4Q16 cash flow and a 113% payout ratio, based on the 4Q16 net income. This was higher than we expected and should be taken positively by the market in our view. At the CMD, NLMK guided for adding 1mtpa of additional slab production by 2019E, to bring total production at the main Lipetsk site to 14mtpa at a cost of USD 400-500m, with a further 1.2mtpa of additional growth being considered. The expansion will be matched with similar increases in iron ore capacity (it expects to be self-sufficient in both pellets and fines). This should be welcomed by the market, in our view, as the new capacity will come at a relatively low cost and low risk (the additions will come from debottlenecking, rather than greenfield expansion). On the 4Q16 results, EBITDA of USD 518m (down 23% qoq) was 2% behind our forecasts (1% behind the consensus), but net income of USD 308m was 8% ahead (and also 8% ahead of the consensus), on the back of revenue that was 2% lower than our estimate, driven by weaker-than-expected prices. However, the 14% qoq fall in steel sales volumes meant that NLMK’s EBITDA fell more than at peers MMK (-6%) and SVST (-10%). FCF of USD 182m was lower than the USD 257m we were expecting, so net debt was flat qoq at USD 689m, resulting in net debt/EBITDA falling to only 0.36x. NLMK remains our top pick in the steel sector.