Metinvest reports robust 1H14 results, expects much worse 2H14

Обзоры по компаниям и отраслям 22.10.2014 Ukraine’s largest steel producer, the vertically integrated holding company Metinvest (METINV), reported on Oct. 21 strong 1H14 financial results. Despite a 8% yoy decrease in revenue to USD 6.0 bln, driven by lower yoy volumes and prices, EBITDA in 1H14 grew 29% yoy to USD 1.6 bln, its EBITDA margin grew 10pp to 29%, net income surged 46% yoy to USD 653 mln, and its net margin improved 4pp to 11%. Operating cash flow before working capital changes grew 17.5% yoy to USD 1.39 bln, though cash flow decreased 14% yoy to USD 766 mln after working capital investments. The company managed to limit CapEx at USD 279 mln (-4% yoy) and reported total debt-to-EBITDA of 1.5x as of end-June, compared to 1.4x in end-March. Payment of dividends appeared to be one of the biggest items responsible for cash outflow: USD 250 mln in 1H14. Overall, the company is going to pay USD 400 mln in dividends this year, as management outlined during the company’s conference call. Breaking down for geography, the largest portion of revenue was generated in Europe (27% vs 25% in 1H13) and the company boosted sales to the MENA region (19% of revenue vs. 16%), mostly at the expense of falling sales to CIS countries (9% vs. 11%). From an operating standpoint, the capacities of the two largest steelmakers of Metinvest, Ilyich Steel and Azovstal, are currently loaded by 50-60% due to logistical constraints. The company is planning to restart its Yenakiyeve Steel plant this month to load only half of its capacity going forward. In a separate announcement, Metinvest has offered the holders of its bonds maturing in 2015 to exchange 80% of the notes’ principal for new notes maturing in November 2017, combined with a cash upfront payment of 20% of the principal. The company will grant an incentive fee of one percent of the principal for the early approval of the offer (by Oct. 31, with the final deadline on Nov. 18) and will increase the coupon rate to 10.5% from 10.25% for newly issued notes. Roman Topolyuk: Metinvest’s 1H14 EBITDA came in 11% lower than we projected, though the result is strong, especially given the currently weak steel market conditions. We attribute the spectacular growth mainly to the steep hryvnia devaluation, which significantly decreased production costs and other operating expenses across the board. Yet Metinvest confirmed in separate comments that its robust 1H14 financial results won’t be replicated in 2H14, which will be much worse given that operations were adversely impacted by the Donbas war. We are decreasing our annual EBITDA expectations by 13% to USD 2.0 bln (flat yoy), which thereby results in a worsened total debt-to-LTM EBITDA ratio of 1.7x (compared to 1.5x, as of end-1H14), still far below the covenant of 3x. We anticipate that the majority of bondholders will agree to the exchange offer from the company. However, restructuring the short bond isn’t the sole necessary measure to cope with its tough repayment schedule in 2015 if Metinvest maintains its currently low capacity load of its steelmakers. Shifting the maturity of its banking debt (the company believes such restructuring could be completed by the year end) and a radical revision of its generous dividend policy will be necessary to keep cash flows in balance. Since no progress in any of the two directions is visible now, we reiterate our negative view of METINV.