vk.com/id446425943

Companies ranked by 12M return

Changes to TPs

We incorporate higher coal and steel volumes and lower unit costs, which results in an increase to our longer-term earnings forecasts. This in turn results in higher TPs for Evraz, +11% to GBp680, and Severstal, +6% to $18.9/GDR.

We incorporate lower sales volume forecasts, which results in a reduction to our AMSA earnings forecasts. We reduce our TP to ZAR5.70 (-3%). All other TPs are unchanged.

Renaissance Capital

3 December 2018

Steel

Companies ranked by 12M return

Figure 1: Summary sector ratings and TPs (ranked by total potential 12M return, including estimated dividends)

	Company	Unit	12M	Previous	Current	12M target	12M fwd	Total 12M	12M forward	Rating
			TP	12M TP	price*	capital return	dividend yield	return	rolling P/E
	Evraz	GBp	680.0	610.0	464.2	46.5%	23.8%	70.3%	4.2x	BUY
	ArcelorMittal SA	ZAR	5.7	5.9	3.9	47.7%	0.0%	47.7%	6.9x	BUY
	Severstal	$	18.9	17.8	15.0	26.1%	13.8%	39.9%	6.9x	BUY
	NLMK	$	27.8	27.8	24.0	15.8%	14.5%	30.3%	7.0x	BUY
	MMK	$	10.2	10.2	8.9	14.6%	12.0%	26.6%	7.1x	BUY

*Priced as at market close on 30 November 2018.

Source: Thomson Reuters, Renaissance Capital estimates

Unchanged investment stance

Evraz – Undemanding multiples

We believe Evraz’s raw material integration reduces its exposure to unfavourable fluctuations in raw material costs and provides security of raw material supply. Evraz’s US operations also benefit from elevated domestic steel prices. We calculate that Evraz trades at an attractive CY19E FCF yield of 14.6%. The combination of a comfortable balance sheet and strong cash generation could translate into attractive average dividend yields of 17% over the next three years (FY18E-20E), in our view. Evraz trades at an undemanding CY19E P/E multiple of 4.3x and EV/EBITDA multiple of 3.5x. We believe Evraz’s share price could see a re-rating, supported by strong cash generation.

MMK – Productivity and favourable sales mix drive attractive EBITDA margins

We believe MMK is well positioned on steel cost curves owing to its continued focus on cost control, high labour productivity and its favourable steel sales mix. We also like the company’s domestic bias (Russia is around 80% of steel sales volumes), which limits its exposure to rising global trade barriers. We calculate average FCF yields of 12% over the next three-years (FY18E-20E). MMK’s strong cash generation combined with its comfortable balance sheet (net cash position of $309mn) could translate into what we view as attractive average dividend yields of 12% over the next three-years, given the company’s commitment to pay out 100% of cash flows.

NLMK – Strong cash generation and attractive yield

We believe NLMK could generate attractive EBITDA margins through the cycle due to its high degree of iron ore integration and coke self-sufficiency. In addition, its geographical diversification provides NLMK with structural cost advantages to reduce the impact of tariff pressure. Management has successfully delivered 85% in EBITDA enhancement of around $245mn through operational efficiencies and investment projects since 1Q18, and is targeting a further $43mn in 4Q18. We calculate average FCF yields of 12% over the next three-years (FY18E-20E). NLMK’s strong cash generation combined with a comfortable balance sheet (FY18E net debt to EBITDA 0.26x) could translate into what

Strong cash generation translates into attractive CY19E FCF yield of 17%

Evraz trades at undemanding multiples

Re-rating potential supported by strong cash generation

Commitment to paying out 100% of cash flows

Conservative near-term capex could support strong cash generation

Potential benefits from higher US steel prices

3

vk.com/id446425943

we view as attractive average dividend yields of 13% over the same period, given the company’s favourable dividend policy.

Severstal – High-quality assets support attractive returns through the cycle

We believe Severstal’s high-quality iron ore and coking coal assets, with around 20-plus years of reserve life, provide it with structural cost advantages and the ability to generate attractive EBITDA margins. Its raw material integration reduces its exposure to unfavourable fluctuations in raw material costs and provides security of raw material supply. Management successfully delivered an EBITDA enhancement of around $250mn through sales and marketing initiatives, and efficiency and productivity gains since 1Q18, and is targeting a further $100mn in 4Q18. We calculate average FCF yields of 10% over the next three-years (FY18E-20E). Severstal’s impressive cash generation combined with a strong balance sheet (FY18E net debt to EBITDA 0.17x) could translate into what we view as attractive average dividend yields of 14% over the same period owing to the company’s favourable dividend policy.

AMSA – Further recovery potential

We believe the sale of MacSteel: 1) is accretive to our valuation; and 2) reduces AMSA’s financial risk and increases near-term liquidity. We believe AMSA’s domestic volumes could benefit from improved domestic conditions post FY19E. We estimate that AMSA could deleverage its balance sheet to 0.1x net debt/EBITDA in FY18E.

Renaissance Capital

3 December 2018

Steel

Low-cost integrated steel producer could generate attractive margins

Focus on returning cash to shareholders

MacSteel sale reduces near-term cash-flow pressure and reduces

AMSA’s financial risk

4