Metinvest 2017 results confirm USD 2 bln EBITDA, large working capital outflows

Metinvest (METINV), Ukraine’s largest steelmaker,
released its full-year 2017 financial results on March 19.

The holding confirmed that its EBITDA amounted to USD
2,044 mln (a 77% yoy surge), the value inferable from its monthly reports.
Revenue rose 44% yoy to USD 8,931 mln, and net income jumped 5.2x yoy to USD
617 mln even after a USD 329 mln loss due to loss of control over assets on
temporarily occupied territory in Donbas. The EBITDA margin increased 4pp yoy
to 23%, and the net margin climbed 5pp to 7%.

Operating cash flow before working capital jumped 69%
yoy to USD 1,734 mln. However, net cash from operations increased only 22% yoy
to USD 595 mln. The holding experienced cash outflows due to a USD 830 mln
increase in receivables during 2017 (2016: USD 442 mln), and a rise in
inventories resulted in cash outflows of USD 358 mln (2016: USD 195 mln). Total
outflows due to working capital changes surged 94% yoy to USD 850 mln.

Net debt stood at USD 2,758 mln at the end of 2017,
inching up 1% yoy, and Consolidated Net Leverage amounted to 1.4x, sliding from
2.1x at the end of 2016.

Dmytro Khoroshun: Metinvest’s
profitability was strong in 2017, and we expect this strength to continue into
at least 1H18. However, working capital cash outflows were huge, most likely
due to the holding’s preparation for the refinancing and restructuring deal
announced on March 19.

We admit that Metinvest would quickly repay the
currently outstanding Eurobond via its cash sweep mechanism under its current
profitability levels, which would result in the shorter average life and lower
fair value of the note, close to the 105.25% of par buyout price proposed by
Metinvest on March 19. However, we think that Metinvest should discuss with
noteholders during the upcoming road show how the note should be valued in the
scenario of much lower profitability, under which the note’s fair value should
be higher by several percentage points, by our estimates.