14 October 2016
Following steel products and iron ore prices recovery in early Y2016 and their certain at least short-term stabilization thereafter H1 2016 financial performance of Metivest was better than it could be expected in the beginning of current year. On the other side risks for the future activity remain high – both market and geopolitical.
EBITDA margin, %
In 1H 2016 revenues of Metinvest decreased y-o-y by 21%. The reason was general decline in prices: as spot world prices declined vs. 1H 2015 – for iron ore by 14% (to USD 52/t), for steel billets - by 15% (to USD 312/t), for slabs - by 6% to USD 308/t, realization prices of Metinvest also decreased – for semi-finished products by approximately 30%, for finished – by 20%. Along with it, in June’16 steel prices have been higher vs. January’16 by about 40%.
On the other side in reporting period total steel production of the company grew by 8% y-o-y up to 4.187Mt, while iron ore concentrate output remained stable at 15.8Mt. Steel output grew mainly because of low base of 1H 2015, when there have been significant disruptions of operations due to conflict in the east of Ukraine escalation.
Speaking about product and geographical sales mix, 60% of total sales in 1H 2016 made finished products, 10% - semi-finished, 17% - iron ore products. Ukraine accounted for 24% of total realization in reporting period (20% a year ago), 36% was realized in European countries.
Despite decline in average realization price, in 1H 2016 profitability slightly improved – EBITDA margin made 20% vs. 17% in 1H 2015. Main contributor to growth of profitability was UAH devaluation (positive influence on costs comprised USD 218M, average USD/UAH rate in last reporting period made 25.47 vs. 21.4 a year ago). Also one should note decrease of energy cost due to lower natural gas consumption and its lower y-o-y price (USD 80M) and lower logistics cost (USD 106M).
Balance Sheet structure
Despite only slightly lower than in 1H 2016 EBITDA (USD 580M vs. USD 623M), operating cash flow decreased more significantly (USD 163M in last reporting period). Main reason – growth of Receivables from USD 1 365M as of 31.12.15 up to USD 1 632M, mainly due to higher realization prices in Q2 2016 vs. Q4 2015. CAPEX in 1H 2016 made USD 116M (stable y-o-y).
Metinvest keeps negotiations with its lenders about restructuring of its obligations, mainly PXF facilities in total amount of USD 1 089M and Eurobonds of USD 1 181M. In May’16 heads of terms for restructuring have been agreed, but final agreement is not reached yet. Total debt as of 30.06.16 made USD 2.981M. At the moment Metinvest pays 30% of due interest payments, while the rest is capitalized. On our view, basing on current fundamentals, we see Metinvest as able to service its interest payments in full volume, while maturity of principal should be extended to FYs2020-2022 (with gradual amortization schedules). Main risks for the company at the moment – market risk (expected steel overproduction due to decrease of Chinese consumption) and geopolitical (possible conflict in the east of Ukraine escalation, mainly operations in Avdeevka coke and metallurgical plants in Mariupol are under risk). As for upside potential one should note that in Q4 2016 certain improvements in railway logistics are expected to be realized which should allow Metinvest to increase output of its Mariupol enterprises.
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