Metinvest EBITDA rises 15% m/m in March

March EBITDA at Ukraine’s largest steelmaker Metinvest
(METINV) jumped 14.8% m/m to USD 225 mln, according to its monthly results
published on May 30. The holding’s revenue expanded 19.9% m/m to USD 1,096 mln.
Metinvest’s operating cash flow before working capital changes increased 11.3%
m/m to USD 197 mln, whereas cash flow from operations (before profit tax and
interest) plunged 83.4% m/m to USD 25 mln in March. The holding’s CapEx fell
7.5% m/m to USD 49 mln and its end-of-month cash balance decreased 7% m/m to
USD 261 mln.

Dmytro Khoroshun: Yet another
strong month for Metinvest regarding EBITDA. However, despite the m/m increase
in steel prices for most of Metinvest’s products (pig iron by 1%, slabs by 2%,
billets by 1%, finished products by 3%), the EBITDA margin of the holding’s
metallurgical segment decreased again m/m, to 12% in March from 15% in
February. We think that one of the factors behind the m/m drop in the EBITDA
margin of Metinvest’s metallurgical segment in March could be the increase in
the share of semi-finished products to 29% of the segment’s revenue from 19% in
February. The EBITDA margin of Metinvest’s mining segment rose m/m to 41% from
35% in February.

Metinvest’s March cash outflow due to accounts
receivable was an enormous USD 255 mln, well above the recent high of USD 205 mln in January.
One of the reasons behind Metinvest’s poor cash performance in March likely was
the holding’s preparation for the refinancing and restructuring deal, the preliminary results of which became known only on Apr. 3.

Nevertheless, Metinvest also has business reasons to
sustain and even increase its investment into working capital, because its
revenue is booming. At the end of 2017, Metinvest’s net working capital (NWC)
was USD 1.6 bln, or 18% of its 2017 yearly revenue (USD 8.9 bln). We can
estimate that Metinvest invested a further USD 0.3 bln into working capital
during 1Q18, increasing its NWC to USD 1.9 bln.

However, during October-February, the holding’s
revenue amounted to USD 0.9-1.0 bln monthly (USD 10.5-12.0 bln yearly), and
even reached USD 1.1 bln in March (USD 13 bln yearly). To maintain its NWC at
18% of its yearly revenue, Metinvest will need to invest up to USD 0.5 bln,
increasing its NWC to up to USD 2.4 bln.

Furthermore, the NWC/Revenue ratio historically was
higher than 18% on some occasions, and a 20% value cannot be ruled out, which
would result in a further investment of USD 0.2-0.3 bln.

Finally, if Metinvest increases steel production to more than 8 mmt per year from 7.4 mmt
in 2017, it would boost the holding’s revenue by up to USD 0.5 bln, requiring
another USD 0.1 bln in working capital investments.

We continue to expect Metinvest’s monthly EBITDA to be
close to, or exceed, the USD 200 mln level well into 2018 due to strong iron
ore and steel prices globally.