Key Investment Highlights
 

1. EVRAZ Plc (LON: EVR) has a wide geographic reach and offer a variety of products including Steel, Coal, Vanadium and Raw Materials.

2. The company is among the top 30 steel producers globally and selling to over 70 countries.

3. EVR is identified as no. 1 in the rail market in American and Russian Markets, Russian beam market, construction steel product market in Russia and LDP market in America.

4. EVR is among top 5 coal producers globally with 239 per cent self-sufficient in terms of coal and 79 per cent in terms of iron ore.

5. The company is primarily focused on meeting the evolving needs of its customers and developing new products and solutions at lower costs to create an additional value.

6. The group’s assets are located in multiple geographic locations, which include Kazakhstan, the Czech Republic, Canada, the USA and Russian Federation.

7. The Group is continuously expanding its product portfolio to meet the rising demand in the long run. In 2020, it is planning to launch a portfolio of small beams, develop SVP-33 mine column and R75 DT 350 rail profile.

8. Robust balance sheet with decent cash flow generation capabilities to drive shareholder returns.

9. The group has shown the ability to make extended investment decisions and construct & operate large projects, which can generate higher cash flows at lower costs.

10. The group is confident towards its business model and management team to tackle the uncertain times created due to coronavirus pandemic and is working closely in sync with its employees, contractors, suppliers, partners, authorities and civil society.

11. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

EVRAZ PLC (LON: EVR) is serving the rising demand with enhanced production, while mitigating the risk of short-term headwinds with diligent strategic efforts.
 
EVRAZ PLC is a FTSE 100 listed steel and mining company with global operations. The Group has footprints in the United States, Canada, Switzerland, Czech Republic, Russia, and Kazakhstan along with officers in London and Moscow. It is a producer of infrastructure steel products and serves more than 70 countries. It is operating as a leading player of infrastructure steel in several markets such as American & Russian rail market, Russian beam market, Russian construction market and American LDP market. It operates with over 71,200 employees while around 93 per cent of employees are in Russian and CIS region. Operationally, the Company produced 13,814 kilo tonnes (KT) of crude steel, 13,230 KT of steel products and 13,765 of iron ore in output in the financial year 2019. The Company was established in 1992 and listed on the London Stock Exchange since 8^th June 2005. In 2011, it became a constituent of FTSE index.


(Source: Company Website)

On 16^th June 2020, the Group will hold its annual general meeting and on 30^th July 2020.

Key Statistics



Segments at a Glance

The Group generates its revenue from the following business segments:
 

Steel

1. Comprises production of steel and related products from locations except North America operations.

2. Generated USD 8,143 million in revenue and USD 1,795 million in EBITDA in FY2019.

3. Number of Employees: ~46,175.
 

Steel, North America

1. Comprises production of steel and related products in Canada and the US.

2. Generated USD 2,500 million in revenue and USD 38 million in EBITDA in FY2019.

3. Number of Employees: ~4,302.
 

Coal

1. Comprises the operations related to coal production and enrichment.

2. Generated USD 2,021 million in revenue and USD 843 million in EBITDA in FY2019.

3. Number of Employees: ~16,133.
 

Other Operations

1. Comprises companies related to energy, railway and shipping transportation.

2. Generated USD 483 million in revenue and USD 18 million in EBITDA in FY2019.
 

(Source: Company Website)

Geographically, the business is differentiated into six divisions, namely Russia, Americas, Asia, Europe, CIS (excl. Russia). Most of its revenue and EBITDA is contributed by Russia operations.

A Glimpse of Key Performance Indicators in 2019 vs 2018

During the financial year 2019, the performance of non-financial key performing indicators is given in the picture below. It shows that Coking coal concentrate cash cost reduced (with increased mining volumes), Labour productivity improved (with increased production at EVRAZ steel mills), Highlighting the crew bus accident in 2019, and declined Intensity ratio (with efficient operations at steel mills).


(Source: Annual Report, Company Website)

Significant Developments of 2020 – Reflecting a change in Capital Structure
 

1. 29^th April 2020: The Group announced the transfer of 4,964,830 ordinary shares out of treasury to the Employee benefit trust.

2. 20^th March 2020: The EVRAZ Group signed a syndicated unsecured credit facility for USD 750 million, which was arranged and underwritten by international banks.
 

Top Shareholders

 

Q1 Trading Update FY2020 – Higher Crude Steel Output and Increased Sale for Iron Ore Products
 

1. On 30^th April 2020, EVRAZ released an update on the trading performance in the first quarter of the financial year 2020. The group in the Q1 2020 reported an increase in the crude steel output by 3.2 per cent versus Q4 FY2019, driven by capital repairs completion at EVRAZ NTMK.

2. The total sales of steel products decreased by 10.4 per cent in Q1 FY2020 versus Q4 FY2019, while semi-finished products sales declined by 15.3 per cent for the period.

3. The group witnessed a decline in the finished products sales by 6.1 per cent, due to a decline in the seasonal demand from Russia in Q1.

4. The production of raw coking coal also declined by 4.8 per cent in Q1 FY2020 versus Q4 FY2019, reflecting weaker demand and lower level of production at Yuzhkuzbassugol mines. Driven by maximising product shipments and higher sales volume in the Chinese region, the coking coal products external sales volumes surged by 30.4 per cent for the period versus Q4 FY2019.

5. The iron ore external sales increased by 30 per cent in Q1 FY2020 versus Q4 FY2019, while the vanadium products sales declined by 9.9 per cent for the period, reflecting lower automotive industry demand and weaker FeV (ferro-vanadium) in Europe demand. The group witnessed an increase in oxide and FeV sales in Russian and Asian regions.

Financial Highlights – Healthy Free Cash Flow for the year ended 31st December 2019


(Source: Annual Report, Company Website)
 

1. For the financial year ending 31st December 2019, driven by a decline in the sales prices of coal products and vanadium products, the company reported a reduction of 7.3 per cent year-on-year in consolidated revenues, which amounted at USD 11,905 million versus USD 12,836 million in FY2018. 

2. In the period, the company’s consolidated EBITDA stood at USD 2,601 million, bringing the EBITDA margin to 21.8 per cent. 

3. The net profit for the financial year 2019 stood at USD 365 million. The company has delivered a healthy free cash flow of USD 1,456 million in FY2019 versus USD 1,940 million in FY2018.

4. The group’s net debt reduced by USD 126 million in FY2019 to USD 3,445 million versus USD 3,571 million in FY2018. 

5. In 2019, the Board approved the payments of an interim dividend per ordinary share of USD 0.40.
 

 
Financial Ratios – Strong Profitability Margins versus the Industry Median 
 


 The reported EBITDA margin, Operating Margin and Pretax margin stood at 21.7 per cent, 9.8 per cent and 7.6 per cent, respectively, for the FY2019 and stood higher than the industry median. The Return on Equity of 19.4 per cent in the financial year 2019 stood higher than the industry median of 6.4 per cent. On the liquidity front, EVRAZ Plc’s current ratio was higher than the industry median of 1.68, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the EVRAZ Plc’swas 2.91x, which was higher as compared to the industry median of 0.40x.

Share Price Performance


Daily Chart as on 6^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 6, 2020, at the time of writing (before the market close, at 9:44 AM GMT+1), EVRAZ Plc shares were trading at GBX 263.70, up by 3.78 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 710.20/GBX 200.60.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings (NTM) Approach
 


To compare EVRAZ Plc with its peers, Price/Earnings multiple has been used. The peers are Castings Plc(NTM Price/Earnings was 22.50), Kaz Minerals Plc (NTM Price/Earnings was 6.73), Chamberlin Plc (NTM Price/Earnings was 4.13), United Company RUSAL Plc (NTM Price/Earnings was 2.14) and Strategic Minerals Plc (NTM Price/Earnings was 0.25). The Average of Price/Earnings (NTM) of the company’s peers was 7.15x (approx.).

Method 2: Price/Cash Flow (NTM) Approach



To compare EVRAZ Plc with its peers, Price/Cash Flow multiple has been used. The peers are China Steel Corp(NTM Price/Cash Flow was 7.35), United Company RUSAL Plc(NTM Price/Cash Flow was 4.87), Kaz Minerals Plc(NTM Price/Cash Flow was 4.06), Ferrexpo Plc (NTM Price/Cash Flow was 2.72) and Trubnaya Metallurgicheskaya Kompaniya PAO(NTM Price/Cash Flow was 1.76). The Average of Price/Cash Flow (NTM) of the company’s peers was 4.15x (approx.).

Dividend Yield

(Source: Refinitiv, Thomson Reuters)

EVRAZ Plc has a dividend yield of 22.93 per cent, which is higher than the industry dividend yield of 7.58 per cent and the sector dividend yield of 19.97 per cent. This needs to be considered in view of the recent correction in the stock price as looks inflated.

EVRAZ Plc Vs FTSE 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, EVRAZ Plc share price has delivered 28.20 per cent returns as compared to negative 15.31 per cent returns of FTSE-100 index, which shows that the stock has outperformed the index during the last five years. 

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)

EVRAZ Plc has a total return of 108.54 per cent in the last five years versus the total return of FTSE All share of 4.01 per cent for five years period.
 
Industry Outlook

Despite the economic and political uncertainties, the year 2019 ended with upward demand and price trend for steel, iron ore & metallurgical coal, and the overall consumption increased by around 3.2 per cent, 3.0 per cent and 2.2 per cent, respectively in 2019. As per the Data mine Intelligence report published recently in April 2020, the Global Iron Ore market is projected to surge by the compounded annual growth rate of 5.40 per cent by 2027.


(Source: Annual Report, Company Website)

Growth Prospects and Risk Assessment

The company is amongst top 30 steel producers and top 5 coal producers globally and has maintained top-notch quality and at a lower cost. The company sell its product to world-class customers, which include big giants from the steel industry. The company is able to maintain adequate capital allocation balance between a strong balance sheet, investment for growth and returns to shareholders. The company has well established internal control systems, which help them to mitigate the risks associated with the working of the company. The company operates in multiple geographies, and its profits can be impacted negatively due to foreign exchange rate fluctuations. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets.

Business Outlook Scenario

The pig iron production volumes are anticipated to increase in FY2020 slightly. Achieved total production volumes of 24 million tonnes in 2020 and increased export sales to Southeast Asia. EVRAZ in FY2020 will focus on improving safety and other important areas for long-term development in future.

It started its downward spiral with COVID-19 breakout lately. In the fiscal year 2019, the company's operations, as well as financial performance, declined and the production of almost all the commodities reduced due to tough economic conditions. However, the company is well-positioned, and the remaining business performance remained robust. The company expected that the iron and steel market fundamentals would step in the company's favour. Despite subdued 2019 demand, commodity markets remained tightly balanced through the year.

The operations of EVRAZ are quite dependent on the global macroeconomic conditions, economic and industry environment. To mitigate this risk, the Group is continuously expanding its product portfolio and penetrating new markets. In 2019, the Company increased the coal mining volume by 8 per cent to 94.9 MT (million tonnes), and US finished steel production grew by 2 per cent to 85.3 MT. 

Over the course of 4 years (FY15 - FY19), the company's revenue surged from $8,767 million in FY15 to $11,905 million in FY19. Compounded annual growth rate (CAGR) stood at 7.95 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 254.10 (as on 5^th May 2020), with lower-double digit upside potential based on 7.15x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 4.15x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 6^th May 2020).

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