WOOD Flash – Severstal: 4Q – EBITDA & FCF ahead of estimates, but higher capex a risk for dividend outlook

Severstal released its 4Q17 financial results this morning (2 February), with strong EBITDA growth, up 22% qoq and 2% above our forecasts (4% above the limited consensus), while net income of USD 563m was up 90% qoq and 80% yoy, due in part to a one-off USD 135m gain on the Yakovlevsky acquisition. FCF was down 11% qoq on higher tax, capex and a lower working capital release than in 3Q17, but this was expected. In fact, it was above our forecast by 21% due to higher EBITDA and lower tax than we had forecast, as Severstal’s cash tax payments continued to be below the tax on the income statement. The RUB 27.72/share dividend announced last night based on these results equates to a c.3.0% quarterly yield and 12% annualised, close to market consensus. They represent a strong set of results, especially for the fourth quarter, which is usually seasonally weak.
However, Severstal’s capex guidance of RUB 49.5bn for 2018E (c.USD 880m at the current exchange rate, +c.49% yoy) and potential for higher capex in the medium term are likely to overshadow these results, in our view, as Severstal invests in upgrading blast furnace capacity and iron ore output at Yakovlevsky. For a company paying dividends based on FCF, this is not good news, in our view.