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Steel sector margins and capex support near-term cash generation

Normalised steel margins per tonne assumptions…

We calculate steel margins based on Bloomberg average sector consumption ratios. We forecast margins falling closer to historical averages.

Renaissance Capital

3 December 2018

Steel

Figure 46: Real steel-making replacement cost margins and near-term forecasts

Steel replacement cost margin

Average

Forecasts

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07

Apr-08

Sep-08

Feb-09

Jul-09

Dec-09

May-10

Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13

Feb-14

Jul-14

Dec-14

May-15

Oct-15

Mar-16

Aug-16 Jan-17 Jun-17

Nov-17

Apr-18

Sep-18 Feb-19 Jul-19

Dec-19

May-20

Oct-20

Mar-21

Aug-21

Source: Bloomberg, Renaissance Capital estimates

…result in attractive EBITDA per tonne

Our normalised steel margins result in what we believe are attractive EBITDA per tonne levels that are above historical averages.

Figure 47: Steel company EBITDA per tonne, $ (2018E real)

						EBITDA per tonne, $/t		Average
180
										165
160
		141
140
											124
120	117					116			113
			110
	Average, 107											106	106
								101
100							92
				85	84
80
60
	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E
Note: EBITDA margins per tonne above are for AMSA, Evraz, MMK, NLMK and Severstal.
											Source: Company data, Renaissance Capital estimates

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Renaissance Capital

3 December 2018

Steel

Near-term capex profile below historical levels…

Sector capex per tonne fell by 74% to $33/t in 2015, from a 2011 peak of $126/t. We believe that, with limited announced projects for the steel companies under coverage and a commitment to return cash to shareholders through dividends, capex should remain below historical average levels in the near term.

Figure 48: Steel peer group historical and forecast capex per steel tonne, $
						Capex per tonne, $/t			Average
140			126
		125
120
100	93			88
80												Average, 73
					64						63	58
60													54
										50
						45			44
								38
40							33
20
0	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E
											Source: Company data, Renaissance Capital estimates

…supporting near-term cash generation…

We calculate that AMSA, Evraz and MMK have the highest FY18E FCF yields of 20%- plus, 16.8% and 16.5%, respectively.

Figure 49: Steel companies’ 2018E FCF yields vs three-year average FCF yield forecasts
25%			2018E FCF yields		Average FCF yields (2019E-2020E)
	20.0%+
20%
	16.8%			16.5%		16.0%
15%	13.6%					13.4%	12.5%
				10.9%
10%
						7.5%
	5.6%
5%
0%

AMSA	Evraz	MMK	Severstal	NLMK
Note: FCF includes disposals and acquisitions over the period.
				Source: Thomson Reuters, Renaissance Capital estimates

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Renaissance Capital

3 December 2018

Steel

… and with balance sheets at comfortable levels…

The Russian steel producers have significantly deleveraged their balance sheets, largely driven by: 1) higher steel prices; 2) the depreciation of the rouble; and 3) disciplined capital allocation.

However, we believe under our cautious outlook for steel prices and any further US actions on Russia, steel producers with greater leverage are more exposed.

Figure 50: Steel peer group CY17 net debt/EBITDA

5x

4x

3x

2x

1x

0x

-1x

3.2x

3.3x

3.3x

3.8x

3.8x

4.0x

Average, 2.0x

1.3x

1.5x

2.4x

2.5x

0.3x

0.4x

1.0x

1.0x

1.1x

1.2x

0.0x

MMK

NLMK

Severstal

Steel Dynamics

US Steel Corp.

Nucor

ArcelorMittal

Posco

Evraz

ThyssenKrupp AG

Gerdau

JFE Holdings

Kobe steel

Hyundai Steel Co.

AK Steel Holding

NSSMC

China Steel Corp.

Source: Bloomberg, Company data

…could translate into attractive dividend potential

Evraz and Severstal offer the highest FY18E dividend yield potential at 21.7% and 18.3%, respectively, on our estimates.

Figure 51: Steel companies’ FY18E dividend yields vs three-year forecast dividend yields
23%			2018E dividend yields		Average dividend yields (2019E-2020E)
	21.7%
21%
		18.2%
19%
17%
				15.5%		15.0%
	14.5%
15%
		12.8%		13.1%
13%
						10.3%
11%
9%
7%
5%
	Evraz		Severstal		NLMK	MMK

Source: Thomson Reuters, Renaissance Capital estimates

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Renaissance Capital

3 December 2018

Steel

100%+ market cap repayment over the next 10 years

We calculate that some steel companies could repay up to 100% of their market caps in dividends over the next 10 years, based on target gearing levels and assuming no further growth projects at value-destructive returns.

Figure 52: Cumulative 10-year dividends as a % of share price

200%
		184%
180%
		157% 147% 139% 136% 133% 132% 132% 131%							125% 121% 118% 118% 113%			110% 109%		107% 107% 103% 102% 101% 99% 98% 96% 93% 90% 90% 89% 89% 88% 88% 88% 86% 86% 84% 83% 81% 76% 75% 73% 69% 68% 67% 64% 62% 61% 60% 58% 58% 56% 54% 54% 54% 53% 52% 51%																												49% 47% 46% 46% 46% 46% 45% 42% 42% 41% 40% 39% 39% 38% 37% 36% 35% 35% 34% 33% 33% 28% 22% 22% 19%
160%
140%
120%
100%
																																																	Average, 78.2%
80%
60%
40%
20%
0%
		Impala			Alrosa Evraz				Anglo Polyus			Norilsk			South32 Assore					Rio		Tobacco			AMSA				Oil			Amplats 2Bank Bank					Retailer Bank Retailer Harmony Food			Food Bank				Private		Healthcare Insurance			Beverages HoldingInv. Retailer Retailer Food Bank						Retailer			2Tech
				ARM				Sasol			NLMK			Exxaro		Fields			Sappi				Bank5						manager	Property RBPlat			2		Mondi Sibanye 1 5 1			2		1					Retailer goods		Tech Retailer miner			3	1	1				Tech
						Merafe Severstal				Polymetal Glencore										Tinto				Kumba			2 1				4			4		Motor	8 1 4				6
	Fortescue		2										AngloGold			Gold		MMK										Property 1gas&					Telecom					2						equity		2		3	3	1 6 2					10		Retailer
			Industrial														Vale				Property						Oil		Asset		Property			Telecom			Industrial Retailer Construction	Beverages AssurerLife					Pharmaceutical			Luxury		Industrial	Diversified	Healthcare	Healthcare AssurerLife Beverages
																					5						gas		1	2				1					2						3		3 9							1		1
																										BHP																											3				2
																											&

Note: Priced at market close on 30 November 2018.

Source: Company data, Thomson Reuters, Renaissance Capital estimates

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