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Veles Capital set price target of $5.75 on NLMK, recommenation - "buy" 17 September 2008 Source: www.veles-capital.ru
Over 1H 2008 NMLK’s net income increased by 43.8% - to 1.531 bn USD, says company’s report. Company’s revenue added 63% and formed 5.884 bn USD, EBITDA increased by 47%, to 2.313 bn USD. The given financial results hit NMLK’s average forecasts, composed according to data received from analysts, whom work in different investment banks and companies. Company’s CapEx formed 822.4 mn USD. Cocking coal expenses per 1 ton of products reached 30.5% vs 25.8% last year. The company expects that EBITDA will exceed 5 bn USD over year 2008, indicates company’s report. Prior news indicate that NMLK plans on increasing steel production by 4% (9.4 mn tons) We see the published results as neutral and expected. Our forecasts met the published figures by 90-100%. It should be mentioned that in spite of a growth of financial results, company has demonstrated a decrease of business efficiency. Thus, EBITDA margin decreased by 4.5 p.p. vs 1H 2007 results. A fall of net income margin totaled 3.5 p.p., operating income margin (-3.2 p.p.) and gross income margin (-3.4 p.p.) respectively. The main supporting drivers of financial results were a growth of activity rate and sale prices (about 30%), whereas the reason of a fall was provided by higher growth rates of expenses vs prices growth, due to low efficiency of Maxi Group, company consolidated earlier. We see the news as neutral and expected for company’s business. NLMK signed an agreement to purchase John Maneely Company for 3.53 bn USD, which could be finished in 4Q 2008. John Maneely’s structure includes 11 plants in USA and Canada with total capacity of over 3 mn tons of pipes per year. Company’s revenue over year 2008 is estimated at 3 bn USD. During 12 months, ended on June 30, John Maneely’s shipments formed 2.1 mn tons of pipes, gaining 2.4 bn USD and EBITDA - 485 mn USD. The given purchase costs of company very high – effective P/S and P/EBITDA ratios hit the average results of the sector. However, the company can not be characterized as highly profitable – EBITDA margin according to 12 months, ended on June 30th formed 20%, which is more than 2 times lower than NLMK’s results. However, the purchased asset can help gaining an access to pipe market and strengthen its positions in USA (NLMK headed assets in USA through joint enterprise with Duferco Group). Thus, the new asset will hardly have a strong effect on business efficiency of NLMK, but it can help to increase revenue and income already in next year. We have reviewed company’s model, forecasts for steel prices, taking into account the purchased asset, the fair price of company’s shares formed 5.75 USD. It should be mentioned that the results of profitable approach have demonstrated a growth of fair price, whereas fair approach – a fall of the given results, but the average level was not changed. Taking into account the fact that a fall at stock markets gave an extra growth potential to NLMK’s share, we confirm our “BUY” recommendation on company’s securities. |
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