Severstal overview: efficient Russian metallurgist

Обзор «Северстали»: эффективный российский металлург

Severstal (MCX: CHMF, LSE: SVST) - one of the largest metallurgical companies in Russia.

About company

Severstal is a vertically integrated metallurgical company, the main asset of which is the Cherepovets Metallurgical Plant. The business of the company consists of two divisions: Severstal Resource and Severstal Russian Steel.

Severstal Resource. The division includes the following production assets:

  1. 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.
  2. Olkon - enterprise, located in the Murmansk region. Produces iron ore concentrate and crushed stone. Mining is carried out in six open pits and one underground mine.
  3. Vorkutaugol. The enterprise is engaged in the extraction of power 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.
  4. 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, what 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:

  1. 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.
  2. Izhora pipe plant. The enterprise 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.
  3. 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, Orlovskaya, Volgograd and Nizhny Novgorod regions.
  4. 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.
  5. 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.
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Severstal produces a significant share of its products with high added value: its share in revenue traditionally exceeds 45%. The company's revenue is well diversified by region and industry. Severstal has flexible sales management - this is evident from the changing revenue structure.

In 2018, Severstal presented a strategy until 2023. Basic goals: cost leadership, providing customers with solutions, which are 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 have emerged for the main product sales areas: "Construction", "Energy" and "Engineering". The company's goal is not just to sell steel products, but to help solve business problems of 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, not growth of production indicators: production of steel and cast iron in recent years has remained at approximately the same levels.

The company also monitors assets, evaluating their necessity and usefulness for their business: in 2019, a long-range plant in Balakovo was sold and a joint venture was created with Tenaris for the production of 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 of Severstal Ventures., which develops venture projects, focusing on those, which can be quickly implemented in the metallurgical industry. In particular, in 2020, investments were made in a Dutch developer of digital automation platforms for the production of composite materials.

Обзор «Северстали»: эффективный российский металлург

Steel production volume 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 price and average selling prices of products of the company's production 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 products with high added value in the structure of revenue by years

2017 46%
2018 46%
2019 45%
2020 47%
1п2021 48%

46%

The structure of the company's revenue by region by year

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%

Steel and pig iron production by the company by year, 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 performance

The company's revenues and net income are on a growing 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..

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H1 2021 performance is excellent: revenue is not much less, than for the whole of 2020, and net income and free cash flow even exceeded the same indicators for the entire record 2018.

The company's net debt has grown steadily in recent years, but in 2021 it significantly decreased 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 - early 2000s, the company began to buy up Russian production assets to achieve vertical integration, and then European, American and Canadian steel mills. In 2006, Severstal almost merged with the second largest metallurgist in the world - Arcelor. In the 2010s, the company gradually withdrew from the previously purchased 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

Severstal's dividend policy has been in effect since 2018 and is one of the most pleasant for investors on 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. Moreover, the company decided to exclude capital expenditures in excess of $ 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 Profitability
2017 110,05 Р 12,4%
2018 160,73 Р 17,0%
2019 115,88 Р 12,4%
2020 116,30 Р 7,4%
1п2021 131,22 Р 8,4%

Terms of dividend policy

Net debt / EBITDA Free cash flow share, payable in the form of dividends
< 0,5 ⩾ 100%
0,5—1 100%
> 1 50%

Free cash flow share, payable 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. Moreover, in investor materials, the company calls itself the world leader in the industry in terms of profitability.

Really, Severstal's multipliers are very attractive both in dynamics, and in comparison with effective competitors: even in difficult 2020, 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 large Russian metallurgists, - one of the main dividend shares 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

Market dependence. Last year was successful for metallurgists due to favorable pricing environment. But it all ends someday: iron ore prices returned to a year ago.

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maybe, this was influenced by a decrease in steel production in China, which produces and consumes more than half of the world's steel. Prices for steel itself are still holding, 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 metallurgical industry is cyclical and highly dependent on world prices.. The situation is complicated by the fact, that there is a chronic oversupply of production capacity in the world.

Increased tax burden. The sharp rise in steel prices has caused discontent among its main consumers - developers and machine builders., followed by governments. The result was the introduction of temporary duties on the export of metals from 1 August to 31 December 2021. it, in turn, led to some cooling of prices on the domestic market - mainly for Severstal.

Moreover, 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. Nevertheless, the tax burden will increase.

ESG. Severstal is actively investing in the environmental sector, which helps to reduce emissions, nevertheless, 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, the talk about future carbon taxes is no longer only in Europe., but also in Russia, and at the highest level.

Обзор «Северстали»: эффективный российский металлург

Обзор «Северстали»: эффективный российский металлург

Обзор «Северстали»: эффективный российский металлург

Severstal's multipliers by year

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

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. She focuses on reducing costs and improving customer engagement. High availability of own raw materials, a significant share of products with high added value in the revenue structure and flexibility in the sales structure help the company to show excellent financial results even in not the best market conditions and generously share profit with shareholders.

In the last year, the conjuncture was very favorable to metallurgical companies, which allowed Severstal to increase its financial performance even more, pay huge dividends, and stock quotes will grow seriously. 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, dividend-oriented, but you need to clearly understand, that representatives of cyclical industries are highly dependent on the conjuncture. maybe, we will see this on the example of metallurgists in the very near future.

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