Metinvest EBITDA halves in 3Q14, total debt declines 6% qoq

Обзоры по компаниям и отраслям 02.12.2014 Ukraine’s largest steelmaker and iron ore miner Metinvest (METINV) reported a 14% yoy decrease in net revenue to USD 8.5 bln in 9M14, according to its Dec. 1 filing. In 3Q14, sales tanked 21% qoq to USD 2.4 bln following a sharp decrease in output and sales of steel-making subsidiaries located in the Donbas region amid the warfare there. The lack of a full capacity load at Azovstal and Ilyich Steel, as well as a standstill of Yenakiyeve Steel since mid-August, were magnified by weakening steel product markets across the board. The revenue of Metinvest’s key business segment, flat products, slid 8% yoy to USD 3.7 bln on a 8% yoy decrease in deliveries to 6 mmt. A 20% yoy decrease in output of long finished products, exacerbated by a decline in prices, led to a 24% yoy cut in the segment’s revenue to USD 972 mln. Metinvest’s traditionally volatile tube segment demonstrated a 3.9x jump in revenue to USD 155 mln as sales increased 4.2x to 156 kt, driven by orders for large diameter pipes in Central Asia. Another well-performing segment was pig iron, where revenue (USD 368 mln) and physical deliveries increased 65% yoy in 9M14. Metinvest’s mining division demonstrated weakness, influenced by a loss of domestic clients owing to the Donbas war, and a decrease in global iron ore prices. Revenue from iron ore concentrate fell 27% yoy to USD 860 mln (on 14% smaller volume), while revenue from iron ore pellets fell 12% yoy (on 3% smaller volume). In terms of the geographical breakdown of finished steel products, Metinvest endured pressure on its revenue in Ukraine and Russia in 9M14, where the local currencies tanked in value. But the company’s revenue rose in Europe (+5% yoy to USD 2.2 bln) and the Middle East (+1% yoy to USD 1.6 bln). The company’s EBITDA grew 13% yoy to USD 2.05 bln in 9M14 (with an EBITDA margin of 24%, higher by 6pp yoy), on the back of hryvnia devaluation, which contributed USD 1.04 bln. Other positive drivers include a decrease in raw material prices, including natural gas, accompanied by lower consumption of energy sources. The metallurgical division’s contribution to total EBITDA came in at 37%, compared to 12% a year ago. CapEx was relatively stable, coming in at USD 412 mln in 9M14 (-3% yoy) and at USD 133 mln in 3Q14 (-14% qoq), with investment having been equally split between its metallurgical and mining divisions. Total debt decreased 6% qoq to USD 3.6 bln as of end-September (its total debt-to-LTM EBITDA ratio is at 1.4x vs. its Eurobonds covenant of 3.0x), while net debt slid 3% qoq to USD 3.2 bln. The company has provided no outlook on operating activity by the year end. Roman Topolyuk: Metinvest offered a surprise to the upside with its 9M14 EBITDA (11% higher than our expectations), having earned USD 437 mln in 3Q14 (-40% qoq). The surprise stems from the unexpected rise in selling prices for flat products (+4% qoq) and long products (+9% qoq). However, EBITDA might fall below USD 200 mln in 4Q14 (-59% qoq) on the back of a 8-9% qoq decrease in long product prices in 4Q14, a 4-5% qoq decline in flat products prices, and a 8-18% qoq plunge in iron ore prices, somewhat supported by hryvnia weakening. We are upgrading our 2014 full year forecast for Metinvest EBITDA by 9% to USD 2.2 bln (implying a +4% yoy increase). Hence, we project the company will still demonstrate a comfortable total debt-to-EBITDA ratio of 1.4x as of end-2014. Our improved outlook for EBITDA and leverage doesn’t bring much optimism as Metinvest continuingly faces logistics constraints for its steelmakers in Donbas. Ilyich Steel, Azovstal and Yenakiyeve Steel can’t be fully loaded and thus can’t compensate for the decline in iron ore prices via internal consumption of raw materials. Assuming the status quo on the operating side, increasing pressure on steel and iron ore products prices and a UAH 15/USD exchange rate, we project the company’s EBITDA to fall to as low as USD 1.5 bln in 2015 (-33% yoy). This will produce a net operating cash flow of USD 1.2 bln next year. As the maturity of 58% of Metinvest’s 2015 Eurobonds was shifted to November 2017, we see a liquidity gap of around USD 200 mln (it was halved after the company’s Eurobonds exchange offer). We maintain our negative view on METINV since the company still needs to renegotiate repayment terms with banking lenders (with a scheduled redemption of USD 808 mln in 2015), as well as reduce dividend payments of USD 400 mln expected in 2014.