NLMK (MCX, LSE: NLMK) — Russian steel producer. Vertically integrated steel company with assets in Russia, Europe and USA.
About company
The largest asset of the company is the Novolipetsk Iron and Steel Works, who gave her the name. Production capacity is 18.5 million tons of steel per year. NLMK identifies six business segments.
Extraction and processing of raw materials. This includes assets, producing raw materials for metallurgical production:
- Stoilensky GOK is a producer of iron ore raw materials from the city of Stary Oskol, Belgorod Region. Estimated, reserves can be developed for more than 100 years. In mid-2021, NLMK announced plans to invest 250 billion rubles by 2027, in order to significantly expand production on the basis of the plant and begin the production of hot briquetted iron.
- Altai-koks is a manufacturer of coke and chemical products located in the city of Zarinsk, Altai Territory..
- Vtorchermet is the largest company in Russia, collecting and processing scrap metal. Conducts activities in 33 Russian regions at more than 200 production sites. Production capacity - 3 million tons of secondary metals per year.
- Dolomit is a producer of the mineral of the same name, located in the Lipetsk region.
- Stagdok is a manufacturer of flux limestones from Lipetsk.
- Lipetsk site, where coke is produced.
All these production assets allow NLMK to be 100% supplied with iron ore and coke, on 64% - crowbar. Also the company 64% provided with its own energy, but by 2023 plans to complete the recycling CHP, which will not only reduce greenhouse gas emissions, but also to bring energy supply to 95-100%.
Flat rolled, Russia. This segment includes Russian assets, producing pig iron, slabs, hot-, cold-rolled and galvanized steel, polymer coated steel: Lipetsk site and Yekaterinburg VIZ-Steel. The segment also includes export traders and service companies.. Part of the semi-finished products - for example, slabs are delivered in fairly large quantities to NLMK's foreign facilities for further processing.
Long products, Russia. In this segment, the company produces steel and long products: skating rink, hardware, fittings. Assets are located in the Sverdlovsk and Kaluga regions.
NLMK, USA. The company has 3 plants in the states of Pennsylvania and Indiana, where steel and thin-sheet products are produced.
NLMK, Europe, flat products. This includes two flat steel mills located in Belgium and France., as well as a service center.
NLMK, Europe, thick sheet. Production of steel semi-finished products and thick plates at plants in Denmark, Belgium and Italy.
Besides, in the first half of 2022, the company plans to launch a plant in India for the production of premium grades of transformer steel with a capacity of 64 thousand tons per year.
Belgian assets, as well as a plant in Verona, Italy, the company owns through NLMK Belgium Holdings (NBH). This is a joint venture with the Belgian state investment fund SOGEPA. Each party has a 49% stake, the remaining 2% is given to the options program.
In recent years, NLMK's steel output has been gradually declining, but generally stable. This is due to the fact, what in 2019 and 2020, repair and modernization work was carried out at the Lipetsk site of the company.
NLMK takes about 20% global slab market. In Russia, the company occupies 18% rebar market, for more than 20% markets for steel production and various types of rolled products, including the entire market of electrical rolled products. Consumers of NLMK products are many sectors of the economy: construction, energetics, automotive industry.
The wide geography of assets allows NLMK to select the best solutions in terms of production costs and proximity to the consumer. All raw material extraction, as well as most of the steel production is carried out in Russia, and the manufacture of final products - in close proximity to the main markets. In particular, located in Russia 94% steelmaking capacities, but only 59% — rolling. This helps NLMK to be among the top five global steel producers in terms of its cost..
But it also has its downsides.: for example, the company even sued the US Department of Commerce over duties, which had to be paid for the import of semi-finished products, made in Russia, for use at NLMK American plants.
Hot-rolled steel and slabs occupy a significant place in the company's revenue structure: together they accounted for nearly half of 2020 revenue. A lot of revenue is also provided by other types of rolled products and cast iron.. High value-added products account for 33% selling.
If you look at the structure of revenue in a geographical context, then a significant part falls on home markets, where NLMK's production assets are located: Russia, countries of the European Union and North America.
Since March 2019, the company has been implementing the 2022 strategy, whose goal is to increase EBITDA by $1.25 billion. This is planned to be achieved by improving operational efficiency, growth in low-cost steel production and sales of steel products, including premium brands.
Naturally, to implement such a strategy, NLMK had to increase capital expenditures: if in the period 2016-2018 their average annual level was about 0.6 billion dollars, to s 2019 they almost doubled to $1.1 billion. It is planned to maintain this level of capital expenditures until the end of the strategy - until 2022 inclusive, after which it is planned to decrease to 0.7-0.8 billion.
The structure of the company's revenue by product type for 2020
| Hot rolled steel | 28% |
| Slabs | 18% |
| Cold rolled products | 11% |
| Long products | 11% |
| Cast iron | 8% |
| Galvanized steel | 8% |
| Hot rolled plate | 5% |
| Rolled products with polymer coatings | 3% |
| Transformer rental | 2% |
| Dynamic rolling | 2% |
| Bar billet | 2% |
| Hardware | 2% |
28%
Structure of production capacities of the company by regions
| Steelmaking | Rental | |
|---|---|---|
| Russia | 94% | 59% |
| USA | 5% | 19% |
| European Union | 1% | 22% |
The structure of the company's revenue by region for 2020
| Russia | 38% |
| EU countries | 18% |
| North America | 14% |
| Near East, including Turkey | 13% |
| Central and South America | 11% |
| CIS | 2% |
| Asia and Oceania | 2% |
| Other regions | 2% |
38%
Volume of production and sales of NMLK steel, million tons
| Production | Sales | |
|---|---|---|
| 2017 | 17,1 | 16,5 |
| 2018 | 17,5 | 17,6 |
| 2019 | 15,7 | 17,1 |
| 2020 | 15,8 | 17,5 |
| 9м2021 | 12,9 | 12,4 |
Steel production volume for 2020 in different companies, million tons
| NLMK | 15,8 |
| Evraz | 13,6 |
| MMC | 11,6 |
| Severstal | 11,3 |
| Metalloinvest | 5,0 |
| Mechel | 3,6 |
15,8
Financial indicators
Revenue, net profit and free cash flow of NLMK similar dynamics: depending on the situation, they grow together, then fall together. Net debt hit its lowest level in recent years in 2018, and then expectedly began to grow with the beginning of a period of large capital expenditures.
Separately, it is worth noting the indicators for 2021: excellent market conditions allowed the company to show amazing financial results. Indicators for just 9 months far exceed even the very successful 2018 as a whole. Net income outperforms other financial indicators: if the pace continues, at the end of the year, it can be comparable to the total net profit, received by NLMK for 3.5-4 previous years.
Financial results of NLMK, billion rubles
| Revenue | Net profit | free cash flow | net debt | |
|---|---|---|---|---|
| 2017 | 586,9 | 84,6 | 74,1 | 115,5 |
| 2018 | 757,0 | 140,7 | 127,1 | 62,2 |
| 2019 | 682,5 | 86,6 | 98,5 | 110,6 |
| 2020 | 667,0 | 89,2 | 79,6 | 195,3 |
| 9м2021 | 855,1 | 277,8 | 179,4 | 199,3 |
History and share capital
The metallurgical plant in Lipetsk began to be built in the first half of the 1930s, and 7 november 1934 received the first cast iron. In the early 1990s, the plant was privatized, further among its shareholders were the structures of Vladimir Potanin, George Soros, brothers Chandler and Vladimir Lisin. As a result, the latter gradually bought out the shares of the remaining shareholders and by the beginning of the 21st century began to control NLMK. The company went public with an IPO in 2005. Vladimir Lisin still owns a controlling stake in the company through the Cypriot Fletcher Group
Share capital structure of the company
| Vladimir Lisin | 79,3% |
| Free float | 20,7% |
Vladimir Lisin
79,3%
Dividends and dividend policy
Like many other public representatives of the metallurgical industry, NLMK has a dividend policy that is pleasant for investors. It implies the payment of dividends on a quarterly basis, depending on the company's debt load.. Payout basis - free cash flow. Furthermore, it uses a normalized capital cost of $700 million per year. Thus, the company is trying to offset the impact on dividends of a period of high capital expenditures..
In recent years, dividend yields have typically exceeded 10%, and the outstanding financial results of 2021 have already brought investors about 15% dividends for 9 Months, so the result will be, probably, about 20% for the year.
Terms of dividend policy
| Net debt / EBITDA | Free cash flow share, paid in the form of dividends |
|---|---|
| < 1 | ≥ 100% |
| > 1 | ≥ 50% |
Free cash flow share, paid in the form of dividends
Dividends and dividend yield of the company
| Dividend, rubles per share | Dividend yield | |
|---|---|---|
| 2017 | 14,04 | 9,5% |
| 2018 | 22,81 | 14,5% |
| 2019 | 17,36 | 12,1% |
| 2020 | 21,64 | 10,4% |
| 9м2021 | 34,66 | 15,2% |
Why stocks can go up
Efficient company with good multipliers. NLMK is an efficient company, that doesn't stand still, modernizing and expanding production. NLMK is able to control production costs, has a significant share of foreign exchange earnings, protecting it from a possible devaluation of the ruble. All this helps the company to successfully survive even not the best times for the metallurgical industry.. This is confirmed by the value of the ROE multiplier, which has been consistently higher in recent years 20%.
NLMK also controls its debt load well. Looking at multipliers compared to competitors, then the company is in the middle between Severstal and MMK in terms of return on equity and cost.
Dividends. Undoubtedly, NLMK is one of the best dividend stories on the Russian stock market. We love dividends. On average, under any conjuncture in recent years, the company has provided a double-digit dividend yield for its shareholders. Certainly, such indicators do not go unnoticed by investors.
Why stocks might fall
And again about the conjuncture. Like many industries, dependent on raw material prices, cyclic metallurgy. This must be taken into account when investing in metallurgists and, in particular, at NLMK. Yes, steel prices have skyrocketed in the last year, but everything can change. In addition, governments are actively fighting inflation., which is growing in Russia, and in the USA, yes and all over the world.
In Russia, the key rate has already almost doubled compared to a record low, and in the United States decided to stop considering inflation as temporary. Maybe, coordinated actions of the monetary authorities will bear fruit - and prices, in particular on steel, will start to fall. Well, do not forget about the excess production capacity in the industry.
And again abouttaxes. In the review of Severstal, we have already analyzed in detail, that the tax burden on Russian steel companies will increase. Also, do not forget about the periodic introduction of duties on the import of steel products in other countries to protect their producers.. For example, such duties were introduced in 2018 in the United States, and the period of protective duties introduced in 2019 in the European Union was extended until 2024.
And again about ESG. NLMK is actively developing in this area in several directions at once:
- reduces emissions both by improving production technologies, and due to plans to use associated gases from metallurgical production for power generation;
- supplies steel for wind turbines;
- does not forget about non-environmental aspects of ESG: the company is among the best employers in Russia.
However, the main disadvantage is that, that the average emissions are 1.83 tons of CO₂ for the production of a ton of steel, what, frankly,, quite a few. So potentially coming carbon taxes could hurt steelmakers and, in particular, according to NLMK, which will negatively affect financial performance and, Consequently, stock quotes.
Another confirmation of that, that this is very serious, there is a recent news about, that Severstal sold its coal asset, even sacrificing vertical integration in the name of ESG. Maybe, we should expect similar news from NLMK in the future.
Multiplier NLMK by year
| P / E | ROE | Net debt / EBITDA | |
|---|---|---|---|
| 2017 | 10,4 | 21,8% | 0,75 |
| 2018 | 6,70 | 34,8% | 0,28 |
| 2019 | 9,95 | 23,6% | 0,67 |
| 2020 | 14,0 | 25,5% | 1,02 |
| 9м2021 | 4,07 | 69,4% | 0,42 |
Multipliers of the largest public Russian metallurgists for 9 months of 2021
| P / E | ROE | Net debt / EBITDA | |
|---|---|---|---|
| NLMK | 4,07 | 69,4% | 0,42 |
| Severstal | 4,94 | 83,0% | 0,29 |
| MMC | 3,94 | 44,2% | 0,12 |
Eventually
NLMK is the largest Russian steel company with an extensive international business. Due to the high availability of raw materials, constant work on efficiency and good diversification, NLMK regularly shows decent financial results and pays solid dividends. The company does not stop there and actively invests in its development.
2021 the year was extremely successful for her due to the excellent market conditions. Following financial performance and expected dividends, stock quotes also went up. But now the situation, seem to be, worsens, governments have actively taken up the fight against unabated inflation - and this has already had a negative impact on quotes. Maybe, this is just the beginning.
As a result, NLMK is a great business, whose shares are one of the main candidates for getting into the portfolio of a dividend investor in the Russian stock market. But be sure to remember, that the cyclical steel industry implies periodic price drops, financial indicators, dividends and quotes. This must be taken into account as already being a shareholder, and when looking for the best time to buy them.
