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NLMK's Q4'19 sales, output rise QOQ as repairs finished; VTB downgrades company

Crude steel output from Russian steelmaker PJSC Novolipetsk Steel, or NLMK, rose 1% quarter over quarter to 3.8 million tonnes in the fourth quarter of 2019 as the company completed repairs that weighed on production throughout the year.

The modest recovery was not enough to offset falling output, which decreased by 13% year over year from the 4.4 Mt recorded in the same period of 2018 according to a Jan. 20 news release. As a result, full-year output shrank 10% to 15.7 Mt from 17.5 Mt in 2018 as major repairs at NLMK Lipetsk's blast furnace and steelmaking operations took their toll.

Production from Lipetsk rose 6% quarter over quarter to 3.0 Mt, while that of the long products division continued to flag and fell 16% to 603,000 tonnes, the company said.

VTB Capital downgraded the stock to "sell" from "hold," citing 9% lower-than-expected crude steel output, while maintaining its 12-month price target of US$18.50 per global depository receipt, according to a same-day note.

NLMK's sales volumes grew 4.0% quarter over quarter to 4.2 Mt due to higher sales of pig iron, which quadrupled on a quarterly basis while decreasing by 15% year over year to 253,000 tonnes. Total sales were in line with expectations but with a slightly better mix, according to VTB Capital's analysts.

Full-year sales slipped 3% to 17.1 Mt even as sales within NLMK's home markets — which comprise Russia as well as North America and the EU — rose 7.0% and hit an all-time high of 11.4 Mt following increased demand for flat and long products in Russia. This was more than offset by a 15% slump in exports to 5.8 Mt.

A seasonal drop in demand depressed average U.S. dollar-denominated prices for uncoated flat steel in Russia, which fell by between 5% and 7% quarter over quarter while rising 2% year over year. Those of rebar dropped 15% quarter over quarter, the company said.

Weak demand reduced export slab prices 10% quarter over quarter, though prices began to recover in mid-November 2019. Average flat steel prices in the U.S. were down quarter over quarter by between 2% and 8%, while related U.S. dollar-denominated prices in the EU dipped 7% to 9%, according to the release.

The decline in steel prices over 2019 will put pressure on NLMK's fourth-quarter financial results, which are expected to "soften" on both a quarterly and annual basis, according to BCS Global Markets analysts. The Moscow-headquartered brokerage previously predicted materially lower financial results compared to the third quarter, when the steelmaker cited weakening demand as one factor in a 47% year-over-year plunge in profit. BCS Global Markets has a "sell" rating on NLMK with a price target of US$15 per global depository receipt.

The steelmaker's fourth-quarter earnings will underperform peers due to the weak export price environment, VTB Capital's analysts wrote. They expect EBITDA to fall 31% quarter over quarter to US$450 million.

"Given the company's high exposure to the export markets, we expect leverage to build up to 0.8x net debt/EBITDA (more than at other Russian domestic flat steel makers) and also a 4Q19 dividend yield of 2.1%," VTB Capital's note read.

NLMK's shares were trading up 0.2% at 150.50 rubles apiece in Moscow by late afternoon, while its global depository receipts were 0.5% higher at US$24.39 apiece by early afternoon in London.

As of Jan. 17, US$1 was equivalent to 61.54 Russian rubles.