29 October 2014
The 3Q14 financial performance of the steelmakers of Metinvest (METINV) – Yenakiyeve Steel (ENMZ UK), Azovstal (AZST UK) and Ilyich Steel (MMKI UK) – worsened from the previous quarter owing to warfare in the Donbas region, but all three companies managed to post solid results for 9M14. Azovstal reported a 41% qoq decline in EBITDA to USD 48 mln, while net income fell 52% qoq to USD 20 mln in 3Q14.
Ilyich Steel endured a 21% qoq decrease in EBITDA to USD 113 mln, while net income fell 5% qoq to USD 51 mln for the period. Yenakiyeve Steel faced the steepest plunge in financial performance among enterprises: EBITDA turned negative at USD -4 mln in 3Q14, compared to a strong USD 75 mln in 2Q14, while net loss came in at USD 39 mln, compared to a positive bottom line in the previous quarter.
All three steelmakers enjoyed a yoy rebound in the 9M14 result: the EBITDA of Yenakiyeve Steel grew 53% yoy to USD 26 mln, Azovstal generated USD 122 mln and Ilyich Steel earned USD 234 mln in EBITDA during the period, compared to large losses in 9M13.
Roman Topolyuk: The worsened 3Q14 financial performance of the steelmakers was a natural consequence of their weakened output. Yenakiyeve Steel suspended production in mid-August after being bombarded; it remained idle throughout September and relaunched production in mid-October.
Azovstal and Ilyich Steel operated at a 50-60% capacity load in 3Q14 due to logisticsconstraints after their railway connections with the port city of Mariupol were damaged. If not for the military actions in the region, the companies would have fully benefited from the positive impact of a raw materials price decline (iron ore by 38% YTM, for example) and local currency devaluation. Azovstal and Ilyich Steel may increase production to some extent in November-December.
For all three subsidiaries, we expect strong EBITDA in 2014, which had been negative during the last three to four years. Azovstal stock trades at 1.3x EV/EBITDA 2014 and Yenakiyeve stock at around 1.0x, which could be an attractive entry point for investors interested in local equities.