WOOD Flash – MMK: 4Q trading update – weaker volumes qoq, but higher price growth than peers

MMK reported its 4Q17 trading update this morning. Overall, the market should take the results as neutral, in our view. Group steel sales missed our estimate by 4% (-11% qoq and -3% yoy), due to weaker seasonal demand, but this performance was worse than its peers, which have already reported relatively flat sales qoq. Average prices rose 11% qoq, despite a weaker mix due to seasonally low 4Q demand, but this exceeded the 7-9% price growth reported by EVRAZ and Severstal in 4Q17 as MMK sold less low-value export steel than its peers. Implied revenue from Magnitogorsk was flat qoq as a result and in line with our forecast. However, its peers exceeded our expectations as we had not updated our models to reflect the rally in steel prices after our last publication in November 2017. On the positive side, coking coal mining increased 41% qoq and concentrate sales were up 16% qoq after a long wall repositioning and the end of mining in a geologically complex part of the Kostromovskaya mine, which bodes well for 2018 production.
We have a USD 12/GDR price target (PT) on MMK, which leaves c.18% upside based on yesterday’s close. Currently, only MMK and Erdemir have meaningful upside to our PTs, with NLMK and EVRAZ (our previous top pick) already having reached theirs, leaving little upside or small downside, despite our BUY recommendations. We see few obvious catalysts for MMK in the short term, but we expect an increase in the dividend payout ratio later in 2018E to result in a partial closing of the valuation gap to its more expensive peers. Its current 4.5x 2018E EV/EBITDA ratio, on our conservative estimates, appears too cheap compared to peer NLMK’s above 6x, in our view.