WOOD Flash – EVRAZ: 4Q17 trading update – growth in sales qoq, driven by higher semis sales

EVRAZ has just released its 4Q17 trading update. Overall, steel sales volumes were broadly in line with our expectations, but the mix was weaker than we expected, with finished product sales 7% weaker than we forecast, down 12% qoq, but flat yoy, despite a stronger steel market than we saw a year ago. Prices were higher than we forecast, but this was due to our model last being updated in November. Average prices in Russia and Kazakhstan rose 7% qoq, but this follows the market trends and, taking account of the worsening mix, this is close to the guidance given by NLMK yesterday, expecting an 8-13% increase in flat prices and a 9% increase in rebar. US volumes and prices were broadly flat qoq, but the high-margin tubular and rail product markets continue to gradually improve, which should be a positive driver for EVRAZ’s EBITDA in 2018E, in our opinion. Overall, the results should be taken as neutral, in our view.
Since we upgraded EVRAZ to BUY in July 2017, it is up 62% and now has only 5% upside to our GBp 390/share price target (PT). At 5.3x 2018E EV/EBITDA, it is fairly valued, on our very conservative assumptions (which assume a USD 458/t Russian export HRC price and a USD150/t hard coking coal price on average in 2018 vs. USD 593/t and USD240/t, respectively, in the spot market currently). However, it would look extremely cheap if we used the current spot prices in our model. We expect a significant fall in steel and coal prices later this year, but the stock has not come close to pricing in the current spot price environment, in our view (the same applies to its peers). Given where steel prices are today, EVRAZ still appears very good value for investors who have a less bearish view on steel and coal prices.