Veles Capital presents analysis update on Severstal:

- Severstal gained 1.208 bn USD of net loss by IAS in 4Q 2008. At 2008 year-end the net profit upped by 9.9% versus 2007 estimate to 2.034 bn USD. The sales increased by 1.44 times to 22.393 bn USD. The company did not provide forecasts of 2009, but lowered capital expenses target for 2009 from 3 bn USD to 1 bn USD, focusing at the repair-technical maintenance.

Our forecasts of sales, EBIT and EBITDA matched 90-95% due to the fact that the dynamics of steel products’ prices was well-known and the low load of capacities was visible at the point of operational data (MMC operated with such low load). Our expectations on the net profit did not justify due to the item “non-circulating assets’ deterioration in value” in the total amount of 1.5 bn USD.

- Net debt of Severstal increased to 4.78 bn USD as of December 31, 2008 (1.65 bn USD as of late 2007). As of December 31, 2008 unutilized long-term credit lines of the company totaled 951 mn USD. In 2009 the company also intends to disentangle 1.2 bn USD from the circulating capital as a result of warehouse inventory reduction, procurement prices cutback, cash assets’ management efficiency improvement.

Virtually Severstal has no short-term financial leverage – short-term interest-bearing debt is almost twice lower than “cash assets and equivalents” value and does not exceed the value of net annual profit. Meaning the company is able to settle with current debts almost instantly. The situation is significantly more complicated in the long run, but close to industry average – better than Evraz, Mechel, MMC and worse than NLMC. However, by the time long-term liabilities’ due date comes, the situation at credit markets might already straighten more or less.

- Severstal will make a retrenchment of 9-9.5 thousand positions of employment at the enterprises of “Russian steel” division (including staff reduction in 2H 2008) and intends to execute the re-education program that will involve about 2.5 thousand people.

Staff size optimization is a quite expected measure. So, if late last year the companies reduced labor cost by the means of temporary measures (reduction of average weekly hours, number of shifts, employees’ wages, etc.), then early this financial year is the right time to cardinally revise the general policy relating staff and wage pool.

- Severstal’s board of directors does not recommend paying-off dividends for 4Q 2008, imparts the report of the company. Besides, the company does not plan dividend payoff for 2009 up to the situation improvement.

Dividends’ cancellation should have also been expected – now it is not the time to gain sympathy of shareholders. More to that the shareholders will like the fact of balance liquidity increase (on behalf of the saved cash assets volume) more, considering miserable dividend yield.

- Eventually, we incline to estimate the report by Severstal as lightly negative due to the profit reduction was stipulated by the influence of paper items. Despite the fact that the fair value of the company’s share lowered to 13.94 USD (15.52 USD earlier), the growth potential is still imposing. Due to that we still assign the recommendation “BUY” to the shares of Severstal.