Metinvest EBITDA jumps 77% m/m in February

EBITDA at Ukraine’s largest steelmaker Metinvest (METINV)
skyrocketed 76.7% m/m to USD 129 mln in February, according to its monthly
results published on Apr. 27. The holding’s revenue gained 4.8% m/m to USD 860
mln.

 

EBITDA excluding that of joint ventures (JVs) jumped
80.3% m/m to USD 119 mln in February.

 

Metinvest’s operating cash flow before working capital
changes jumped 2.2x m/m to USD 123 mln in February, whereas cash flow from
operations after working capital changes (but before profit tax and interest)
plunged to negative USD 6 mln in February from positive USD 107 mln in January.
Cash outflow due to increase in accounts payable skyrocketed to USD 191 mln in
February, compared with an inflow of USD 40 mln in January.

 

The holding’s cash outflow from investment activities
inched up 1.4% m/m to USD 74 mln. Metinvest’s inflow from financing activities
amounted to USD 71 mln and its end-of-month cash balance decreased 13.1% m/m to
USD 253 mln. Its gross debt rose USD 65 mln m/m to USD 3,092 mln, while net
debt increased USD 103 mln m/m to USD 2,839 mln.

 

Metinvest’s metallurgical segment EBITDA (including
JVs) skyrocketed 3.8x m/m to USD 46 mln in February, while its mining segment
EBITDA jumped 36.0% m/m to USD 102 mln.

 

Excluding JVs, Metinvest’s metallurgical segment
EBITDA climbed 2.8x m/m to USD 56 mln in February, while its mining segment
EBITDA advanced 36.7% m/m to USD 82 mln.

 

The ratio of Metinvest’s net debt to its last-12-month
(LTM) EBITDA rose to 2.83x at the end of February, up from 2.75x a month ago.

 

In 2M20, Metinvest’s revenue dropped 8.2% yoy to USD
1,681 mln, while its EBITDA including JVs dropped 19.5% to USD 202 mln and
EBITDA excluding JVs lost 18.9% yoy to USD 185 mln.

 

Iron and steel product prices rose m/m in February, gaining
2% for pig iron, 7% for slabs, and 5% for flat products. Iron ore concentrate
price rose 9% m/m, while the pellet price slid 3% m/m.

 

Dmytro Khoroshun: A very
impressive EBITDA performance by Metinvest, but it might have come at the cost
of aggressive trading tactics, as suggested by the large operating cash outflow
due to the increase in receivables. Metinvest’s increasing its gross debt by
USD 65 mln might in part be related to the holding trying to compensate the
increase in its receivables by taking on short-term trade finance.

 

If Metinvest indeed chose to prioritize profits over
cash in its February trading activity, this was logical in the short term if
the holding tried to avoid having to amend its 3x covenant on net debt over L12M EBITDA (excluding JVs). Namely, we calculate that Metinvest needs to
earn USD 109 mln of EBITDA (excluding JVs) in March in order to comply with
this covenant as of Mar. 31, which seems realistic considering its USD 119 mln
EBITDA (excluding JVs) for February.

 

Nevertheless, the situation has changed dramatically
since the end of March because Ukraine’s export steel prices plunged
15-25% from their 1Q20 peaks. As a
result, we think that right now Metinvest should seriously consider (a)
approaching its creditors in order to amend debt covenants, including net debt/EBITDA, and (b) prioritizing cash over profits, including divesting
from working capital, in order to remain solvent and able to service its debt.
These actions will allow Metinvest to avoid default, which – considering the
holding’s substantial investments into working capital – should be feasible for
the next few quarters. A possible risk to this strategy is a cash flow shock if
Metinvest needs to reduce, substantially and quickly, the amount of its trade
finance.

 

We do not think that prioritizing profits over cash
will help Metinvest in the short-term perspective of the next few months,
because such tactics will serve no realistic purpose. For example, in order to
keep its consolidated net leverage ratio below 3x as of June 30, assuming USD
2.84 bln of net debt (the same as end-February), and excluding JVs’ EBITDA from
the calculation, Metinvest needs to earn USD 118 mln per month of EBITDA on average
in March-June, which as of now looks unrealistic because of the slump in steel
prices in March-April. This is why we think that Metinvest should turn around
and start prioritizing cash over profits.

 

We maintain our negative view on METINV bonds.