Equity Analysis /
Russia

Evraz PLC: CMD 2021 – Updated strategy targets US$630mn EBITDA gains by 2026; Neutral

  • EVRAZ held its Capital Markets Day today with the coal asset demerger, the company’s strategy and ESG in the spotlight

  • EVRAZ growth profile and target $630 mn EBITDA increase

  • EVRAZ raises its ESG ambitions

Boris Krasnozhenov
Boris Krasnozhenov

Head of Research (Managing Director)

Yulia Tolstykh
Yulia Tolstykh

Analyst, Metals & Mining

Alfa
10 November 2021
Published by

EVRAZ (EVR: LN; E/W) held its Capital Markets Day today with the coal asset demerger, the company’s strategy and ESG in the spotlight. Management communicated a positive outlook reflecting a supportive market environment for the growth strategy. We note an initiative to process 3.2 mn t of export semis sales into finished steel products sales by 2026. The announced capex plans of $1bn pa is comparable that of major domestic peers. The upcoming coal asset demerger in 1H22 (subject to equity or cash distribution) remains a near-term catalyst. Another interim dividend announcement is expected in November-December and should also support the stock through the year-end.

Coal assets demerger:

  • BoD approval of the Raspadskaya demerger and publication of the shareholder documentation is expected by the year- end. The demerger (meaning the distribution of Raspadskaya shares with cash option remaining in place) is expected to take place in 1H22 subject to regulatory and corporate approvals.

  • The current capex plans do not include capex for coal assets.

  • The coal asset demerger will not affect current dividend policy that remains unchanged (a minimum dividend payout of $300 mn pa).

Our view: We agree that the potential coal asset demerger leaves more space for steel segment development in connection with best ESG-practices. We note that the coal assets were responsible for 18% of FY20 EBITDA ($400mn). The demerger itself may lead to cash outflows in 1H22 which may be less material should EVRAZ’s major shareholders prefer a stock option. Nevertheless, the proposed EBITDA gains from growth projects in the steel business have a high chance of overlapping the negative effect of the demerger upon successful completion.

EVRAZ growth profile and target $630 mn EBITDA increase:

  • EVRAZ confirmed plans to enter the flat steel market though the construction of a 2.5 mtpa integrated flat casting and rolling facility at EVRAZ ZSMK with the launch anticipated in 2025 and estimated capex of $767 mn. That should bring a $130 mn EBITDA effect with 85% of it attributed to the domestic market sales.

  • EVRAZ continues to develop the Pueblo rail mill with the first 100-m rails expected in 2023. The project is also capital intensive ($726 mn) yet the current $70 mn EBITDA estimate does not include the potential premium for greener steel produced as the project is meant to be fully supplied by solar energy.

  • Among other important initiatives are the rail & beam mill modernization at EVRAZ NTMK aimed to bring 200kt of rails and 300 kt of beams and responsible for $90 mn EBITDA increase for $210 mn of capex.

  • Other projects portfolio consists of Evrazruda development (+$60 mn), EVRAZ KGOK development (+$30 mn), a vanadium slag processing plant (+$60 mn), a small-scale development projects (+$110 mn) and other products in portfolio (+$80 mn).

Our view: EVRAZ’s plans to increase its share of domestic sales to 58% from 41% implies bringing to the domestic market an additional 2.2 mn t of finished steel which represents risks to supply demand balance and may put domestic steel premium under pressure due to higher competition. EVRAZ plans to decrease exports of semis sales by 3.2 mn t while delivering 3.4 mn t of finished steel sales with major shift to the domestic market. This fact may support external demand for semis and suggest attractive export alternative for other players.

EVRAZ raises its ESG ambitions:

  • The company introduced new climate-related targets up to 2030 this year which among other bullets implies 20% GHG emissions reduction vs 2019 base year to 1.58tCO2/t.

  • Possible upgrade of production facilities may take place in 2025-35 though an increased share of scrap and EAF, DRI facility construction and alternative energy sources.

  • Investments in environmental projects in 2022-25 are estimated above $200 mn.

Our view: EVRAZ outperformed its GHG emission target for 2022 already in 2020 reaching 1.97tCO2/t for Scope1+2. More ambitious ESG targets imply potential rerating on higher ESG score.

Among other highlights:

  • EVRAZ is considering a listing on the Moscow Exchange that may be initiated after completion of demerger process. We view this as a positive factor for the stock’s liquidity.

  • Commenting on the future price dynamics for steel products management said that price softening is inevitable yet the company is sticking to major IB banks consensus that price softening may be limited to 10-15% leaving the prices at historically attractive level. In the meantime, Russia’s expected GDP recovery in the coming years is anticipated to provide a floor for flat steel consumption growth by 4.4 mn t by 2026 and by 1.2 mn t for long products.

  • The effect from new taxation in Russia is estimated at $250-300 mn range which is close to our in-house projections.

  • The management plans to discuss possibility of another interim dividend distribution during next BoD meeting scheduled for 18 November or later in December. EVRAZ has already announced $1.1 bn of dividends based on 2021 financials. Total amount of dividends recommended YTD is $1.5 bn representing attractive 12.5% dividend yield.