WOOD Flash – NLMK: 4Q17 production results – higher-than-expected volumes, beating seasonal weakness

NLMK has just reported its 4Q17 production results. Crude steel production was 7.2% higher than we expected and up 1.9% yoy (down 2.5% qoq) as the group ran at 99% capacity utilisation. Consolidated sales volumes were 6.3% above our forecast, up 20% yoy and 2.9% qoq, despite 4Q normally being a weak quarter in terms of volumes due to lower construction activity in the winter. Although NLMK gives no breakdown of steel prices, the price guidance in its main markets was moderately more conservative than we modelled previously, but they were broadly in line with the market trends. We expect the market to take these results as positive overall.
We continue to like NLMK, and these results continue to show the company delivering on its production plans. NLMK offers more production growth than its steel peers under our coverage, in addition to a high single-digit dividend yield. It appears expensive on our current assumptions (which use a USD 458/tonne export 2018 average HRC price vs. USD 593/tonne at the current spot), at 6.3x 2018E EV/EBITDA vs. a five-year average of 5.8x, but cheap if we were to use spot steel prices in our model. We continue to believe that steelmaking margins are excessive at the moment and should fall by next year, but the share price is reasonable value, given the present steel price environment.