Metinvest EBITDA plunges 44% m/m in December

EBITDA at Ukraine’s largest steelmaker Metinvest
(METINV) plunged 44.0% m/m in December to USD 103 mln, according to its monthly
results published on March 5. The holding’s revenue gained 5.6% m/m to USD 968
mln. Metinvest’s operating cash flow before working capital changes slid 4.4%
m/m to USD 153 mln, whereas cash flow from operations (before profit tax and
interest) dropped 28.4% m/m to USD 68 mln in December.

 

The holding reported a net cash inflow from investment
activities of USD 28 mln (vs. an outflow of USD 74 mln in November), including
an inflow of USD 41 mln from dividends received. Metinvest’s cash outflow from financing
activities amounted to USD 123 mln and its end-of-month cash balance dropped
23.5% m/m to USD 280 mln.

 

Metinvest’s metallurgical segment EBITDA dropped to
USD -9 mln in December (vs. USD 69 mln in November), while its mining segment
EBITDA rose 7.6% m/m to USD 113 mln.

 

In relation to its EBITDA result, Metinvest noted that
in December it impaired certain trade and other accounts receivable totaling
USD 55 mln, of which USD 46 mln are the VAT assets of subsidiaries whose
operations were located on the temporarily occupied territory of Donbas.

 

Steel product prices demonstrated broad weakness m/m:
for pig iron and billets (-3% both), slabs (-8%) and finished products (-4%).

 

In 2018, Metinvest’s revenue increased 33% yoy to USD
11.88 bln, while EBITDA rose 23% yoy to USD 2.51 bln. By segment, the 8% yoy
drop in mining segment EBITDA to USD 1.27 bln was more than offset by a 60% yoy
jump in metallurgical segment EBITDA to USD 1.29 bln.

 

Dmytro Khoroshun: Metinvest’s
metallurgical segment EBITDA before one-offs was not higher than USD 46 mln in
December (assuming no one-offs other than the USD 55 mln in impairments), which
is close to what we expected, due to the
plunge in steel prices that took place during August-January. We continue to
expect Metinvest’s metallurgical segment EBITDA to remain close to the low
range of USD 40-60 mln per month during 1Q19. However, we expect the segment’s
EBITDA to increase in 2Q19 because steel prices rebounded in February following
the Vale mine disaster in Brazil.

 

The relatively high amount of financing cash outflows
in December, USD 123 mln, might be related to Metinvest repaying loans from its shareholders.
We estimate that in 2018, Metinvest’s total returns to its shareholders,
comprised of dividends and loan repayments, was USD 500-600 mln. As we
discussed for a long time, Metinvest’s shareholders might need returns,
particularly to settle a USD 821 mln legal bill.
We think that Metinvest rewarding its shareholders is normal, but the key
question is the amount of shareholder returns, which depends on at least two
factors.

 

Firstly, there is a cap on Metinvest’s returns to
shareholders in the amount of 50% of its disclosed consolidated net income. For
the period from January 2017 until June 2018, for which it had already
disclosed financial statements, Metinvest was entitled to distributing a total of USD 642 mln to shareholders,
either via dividends or repaying shareholder loans. We estimate that
Metinvest’s 2H18 net profit amounted to approximately USD 550 mln, which would
allow for an additional maximum of USD 275 mln of dividends. We also estimate
that for a typical year with USD 2.0 bln of EBITDA, Metinvest would earn net
profit of about USD 800 mln, allowing for the maximum of USD 400 mln of
dividends. For a year with USD 2.5 bln of EBITDA, like 2018, Metinvest would be
allowed the maximum of USD 600 mln of dividends.

 

Secondly, there should be some kind of
dividend/shareholder returns policy under which Metinvest operates. Officially,
there have been no announcements regarding such a policy. We think that the
returns to shareholders in 2018, which we estimate at USD 500-600 mln, might
have been higher than in an average year because of the one-off need to pay a
USD 821 mln legal bill. In other words, we would expect returns to shareholders
(mostly in the form of dividends starting from 2019) in an average year to
amount to approximately USD 400 mln.