Severstal (MCX: CHMF, LSE: SVST) — one of the largest metallurgical companies in Russia.
About company
Severstal is a vertically integrated steel company, the main asset of which is the Cherepovets Metallurgical Plant. The company's business consists of two divisions: Severstal Resource and Severstal Russian Steel.
Severstal Resource. The division includes the following mining assets:
- Karelsky Okatysh is a manufacturer of high-quality iron ore pellets with an iron content of up to 67% from the Republic of Karelia. Field reserves are estimated at billions of tons.
- Olkon - enterprise, located in the Murmansk region. Produces iron ore concentrate and crushed stone. Mining is carried out at six open pits and one underground mine.
- «Vorkutaugol». The enterprise is engaged in the extraction of thermal and coking coal in the Komi Republic. They plan to stop producing thermal coal in 2022 due to the transition of the company's CHPP from coal to gas. 17 years. The enterprise includes underground mines, quarry, concentrating factories, mechanical plant, infrastructure.
- Yakovlevsky mine - a deposit with ore reserves with a high iron content, estimated over 9 billion tons of resources, located in the Belgorod region. The company is actively increasing production. According to plans in 2023, production will reach 5 million tons per year, which is five times more, than it was in 2017.
The overwhelming majority of the division's products are used for the internal needs of Severstal, which allows the company to be provided with iron ore for 130% - that is, to fully support yourself and sell it to other companies, and coking coal and electricity - on 80%.
Production costs are sometimes well below selling market prices: vertical integration allows the company to reduce the cost of steel production.
Severstal Russian Steel. The division includes steel and service assets:
- Cherepovets Metallurgical Plant is one of the largest autonomous metallurgical enterprises in terms of production in the world. Produces products of sheet and long products, located in the Vologda region.
- Izhora pipe plant. The company is located in Kolpino in St. Petersburg. Capacity - 600 thousand tons of large diameter pipes per year. The main consumers of the plant's products are oil and gas companies.
- Severstal-metiz. The enterprise manufactures more than 100 thousand types of products, including nails, fittings, steel profiles and ropes and much more. Plants are located in the Vologda, Oryol, Volgograd and Nizhny Novgorod region.
- Severstal-distribution. The company provides steel processing and distribution services. There are sales offices and warehouses in the European part of Russia and 12 EU countries. Sales volume - 2.5 million tons of steel products per year.
- Service centers and stamping plants in the Kaluga and Leningrad regions. These are joint ventures with large international companies: Gonvarri, Gestamp и Mitsui. Are engaged in cutting rolling, production of blanks and products up to automotive parts.
Severstal has a significant share of high value-added products: its share in revenue traditionally exceeds 45%. The company's revenue is well diversified across regions and industries. Severstal manages sales flexibly, which is evident in the changing structure of revenue.
In 2018, Severstal presented a strategy until 2023. Basic goals: cost leadership, providing customers with solutions, based on a deep understanding of their needs, and an annual increase in EBITDA by 10-15%.
To achieve these goals, the company has significantly increased capital expenditures since 2019 and plans to maintain their high level until 2024. Also, Severstal modernized its business structures for greater customer focus.
Dedicated teams for major sales sectors emerged: "Construction", "Energy" and "Engineering". The company's goal is not just to sell steel products, help solve business problems for clients. In particular, Severstal develops new formats of interaction with construction companies.
The increase in EBITDA is planned to be achieved mainly due to efficiency, rather than the growth of production indicators: steel and iron production has remained at about the same levels in recent years.
The company also monitors the assets, evaluating their necessity and usefulness for your business: in 2019, a long products plant in Balakovo was sold and a joint venture was established with Tenaris to produce oil country tubular goods in Surgut, and in 2021 - purchased share 20% in a large pipe manufacturer NVTZ and an increase in the share in a joint venture for the production of wind turbine towers.
The company also has a division Severstal Ventures, which develops venture projects, focusing on those, what can be quickly implemented in the metallurgical industry. In particular, in 2020, investments were made in the Dutch developer of digital automation platforms for the production of composite materials.
Production volume of steel by the largest Russian metallurgists in 2020,million tons
| NLMK | 15,75 |
| Evraz | 13,63 |
| MMC | 11,57 |
| Severstal | 11,31 |
| Metalloinvest | 4,97 |
| Mechel | 3,61 |
15,75
Share of domestic sales, cost and average selling prices of products of the company's mining subsidiaries in 2020, dollars per ton
| Share of domestic sales | Cost price | Average selling prices | |
|---|---|---|---|
| Karelian pellet | 99% | 24 | 90 |
| Olkon | 98% | 24 | 72 |
| Vorkutaugol | 94% | 65 | 67 |
Share of high value-added products in the revenue structure by years
| 2017 | 46% |
| 2018 | 46% |
| 2019 | 45% |
| 2020 | 47% |
| 1п2021 | 48% |
46%
Structure of the company's revenue by regions by years
| Russia | Europe | CIS | Near East | Other | |
|---|---|---|---|---|---|
| 2017 | 64% | 16% | 7% | 5% | 8% |
| 2018 | 63% | 24% | 6% | 3% | 4% |
| 2019 | 67% | 22% | 6% | 2% | 3% |
| 2020 | 62% | 25% | 7% | 3% | 3% |
| 1п2021 | 53% | 37% | 5% | 2% | 3% |
The structure of the company's revenue by industry by year
| Construction | Mashino- and automotive | Energy | Other | |
|---|---|---|---|---|
| 2017 | 44% | 9% | 11% | 36% |
| 2018 | 43% | 9% | 8% | 40% |
| 2019 | 57% | 10% | 9% | 24% |
| 2020 | 57% | 11% | 6% | 26% |
Production of steel and iron by the company by years, million tons
| Steel | Cast iron | |
|---|---|---|
| 2017 | 11,7 | 9,2 |
| 2018 | 12,0 | 9,1 |
| 2019 | 11,8 | 9,5 |
| 2020 | 11,3 | 9,5 |
| 1п2021 | 5,7 | 5,3 |
Financial indicators
The company's revenue and net income are on an upward trend - with an obvious dip in 2020. Free cash flow dynamics are even more volatile. Increased capital expenditures had some impact on its decline in 2019 and 2020..
H1 2021 performance is excellent: revenue is not much less, than all of 2020, and net income and free cash flow even exceeded those for the entire record-breaking 2018.
The company's net debt has gradually increased in recent years, but in 2021 it decreased significantly and again became less than the company's net profit for the period.
Financial performance of the company, billion rubles
| Revenue | Net profit | free cash flow | net debt | Capital expenditures | |
|---|---|---|---|---|---|
| 2017 | 450,4 | 101,5 | 81,6 | 61,1 | 34,5 |
| 2018 | 528,1 | 130,3 | 100,5 | 85,2 | 43,6 |
| 2019 | 527,5 | 114,3 | 71,1 | 97,2 | 74,8 |
| 2020 | 485,8 | 74,6 | 61,6 | 149,9 | 90,2 |
| 1п2021 | 383,0 | 137,6 | 106,0 | 111,0 | 38,7 |
History and share capital
Severstal considers 1955 to be the beginning of its history, when the first batch of pig iron was produced at the Cherepovets Metallurgical Plant. In 1993, the company was corporatized and later privatized, since then the controlling shareholder of Severstal is Alexey Mordashov.
In the late 1990s and early 2000s, the company began buying up Russian mining assets to achieve vertical integration, and then European, American and Canadian steel mills. In 2006, Severstal almost merged with the second largest steelmaker in the world - Arcelor. In the 2010s, the company gradually withdrew from previously acquired foreign assets and focused on the development of its Russian enterprises.
Share capital structure of the company
| Alexey Mordashov | 77,03% |
| Free float | 22,97% |
77,03%
Dividends and dividend policy
The dividend policy of Severstal has been in effect since 2018 and is one of the most favorable for investors in the Russian market.
The company pays dividends on a quarterly basis. The basis for calculation is free cash flow, for payments can be sent from 50% and even more 100% depending on the debt burden. Besides, the company decided to exclude capital expenditures over $800 million per year from the dividend base, to minimize the impact of a period of high capital expenditures on dividends.
Dividends and dividend yield of the company
| Dividend | Yield | |
|---|---|---|
| 2017 | 110,05 R | 12,4% |
| 2018 | 160,73 R | 17,0% |
| 2019 | 115,88 R | 12,4% |
| 2020 | 116,30 R | 7,4% |
| 1п2021 | 131,22 R | 8,4% |
Terms of dividend policy
| Net debt / EBITDA | Free cash flow share, paid in the form of dividends |
|---|---|
| < 0,5 | ⩾ 100% |
| 0,5—1 | 100% |
| > 1 | 50% |
Free cash flow share, paid in the form of dividends
Why stocks can go up
Leader in profitability with good multipliers. Severstal has low production costs, which helps her to get through even the most difficult times, staying profitable. Furthermore, in materials for investors, the company calls itself the world leader in the industry in terms of profitability.
Really, Severstal multiples are very attractive both in dynamics, and compared to efficient competitors.: even in a difficult year 2020, the value of the ROE multiplier was 37%, usually it is more 50%, and that and 60%. This is combined with the low cost of the multiplier P / E and low debt burden.
Dividends. Severstal, like other major Russian metallurgists, — one of the main dividend stocks on the Moscow Exchange. The company has a pleasant and predictable dividend policy, regular dividends and nearly annual double-digit dividend yields.
Why stocks might fall
Dependence on market conditions. Last year was successful for metallurgists due to favorable pricing environment. But everything ends someday: Iron ore prices bounce back to year-over-year levels.
Maybe, this was affected by the decline in steel production in China, which produces and consumes more than half of the world's steel. Steel prices are holding up, but may decline following raw materials. Maybe, An additional driver of price reduction will be the problems of one of the leading Chinese developers Evergrande.
In any case, the steel industry is cyclical and highly dependent on world prices.. The situation is complicated by the fact, that the world is chronically overcapacitated.
Increased tax burden. The sharp rise in steel prices has caused discontent among its main consumers - developers and machine builders., followed by the government. The result was the introduction of temporary duties on the export of metals from 1 August to 31 December 2021. This, in its turn, led to some cooling of prices in the domestic market - mainly for Severstal.
Furthermore, The Ministry of Finance considered the option to significantly increase taxes for companies, who spend more money on dividends, than investment, but in the end the government and business came to a compromise. However, the tax burden will increase.
ESG. Severstal actively invests in the environmental sector, which helps to reduce emissions, but still the metallurgical industry with current technologies is one of the leaders in terms of emissions: according to WorldSteel, in the production of a ton of steel, on average, 1,83 tons of CO₂. And the ESG direction is now more and more popular even among institutional investors, so this could negatively affect the quotes of shares of metallurgists. In addition, future carbon taxes are no longer only talked about in Europe., but also in Russia, and at the highest level.
Multipliers of Severstal by years
| P / E | ROE | Net debt / EBITDA | |
|---|---|---|---|
| 2017 | 7,32 | 52,1% | 0,41 |
| 2018 | 6,06 | 65,4% | 0,43 |
| 2019 | 6,87 | 53,3% | 0,54 |
| 2020 | 17,6 | 37,0% | 0,85 |
| 1п2021 | 7,30 | 61,6% | 0,36 |
Multipliers of the largest public Russian metallurgists for 1 half year 2021
| P / E | ROE | Net debt / EBITDA | |
|---|---|---|---|
| Severstal | 7,30 | 61,6% | 0,36 |
| NLMK | 6,03 | 53,0% | 0,43 |
| MMC | 5,70 | 34,0% | 0,12 |
The structure of steel production and consumption in 2020
| Production | Consumption | |
|---|---|---|
| China | 57% | 53% |
| Rest of Asia | 17% | 19% |
| European Union | 7% | 8% |
| North America | 7% | 7% |
| CIS | 5% | 2% |
| Latin America | 2% | 2% |
| Rest of Europe | 2% | 2% |
| Near East | 2% | 4% |
| Africa | 1% | 3% |
| Australia and New Zealand | < 1% | < 1% |
Eventually
Severstal is a large metallurgical company, which constantly demonstrates its effectiveness. It focuses on cost reduction and closer interaction with customers.. High availability of own raw materials, a significant share of high value-added products in the revenue structure and flexibility in the sales structure help the company to show excellent financial results even in difficult conditions and generously share profits with shareholders.
Over the past year, the situation has been very favorable to metallurgical companies, which allowed Severstal to increase its financial performance even more, pay huge dividends, and stock prices will rise significantly. But with all this, there is a chance, that the peak is passed: market conditions, seem to be, worsens, and the tax burden is definitely increasing.
As a result, Severstal is one of the best stocks on the Russian market for investors, focused on dividends, but it needs to be clearly understood, that representatives of cyclical industries are highly dependent on market conditions. Maybe, we will see this on the example of metallurgists in the very near future.
