EVRAZ PLC (LON: EVR) – Combatting Short-Term Headwinds by Enhancing Production and Leveraging Low-Cost Competitive Advantage

Established in 1992, EVRAZ PLC is a FTSE 100 listed Industrial Metal Mining Company, which has been listed on the London Stock Exchange since 8^th June 2005. Primarily, it is operating as a steel and mining Company with global operations. The Group has footprints in the United States, Canada, Switzerland, Czech Republic, Russia, and Kazakhstan along with offices in London and Moscow. It is a producer of infrastructure steel products and serves in 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.

On 16^th June 2020, the Group will hold its annual general meeting and on 30^th July 2020, it has scheduled to announce a trading update for the Q2 FY20.


(Source: Presentation, Company Website)

Key Fundamental Statistics



A Glimpse of Operating Segments

The Group has bifurcated the business into the following segments:
 

1. Steel: This segment comprises the production of steel and related products from locations except for North America operations. It had generated USD 8,143 million in revenue and EBITDA of USD 1,795 million in FY2019. It employs around 46,175 people.

2. Steel, North America: This segment comprises the production of steel and related products in Canada and the US. It had generated USD 2,500 million in revenue and USD 38 million in EBITDA. It employs around 4,302 people.

3. Coal: The Coal segment comprises the operations related to coal production and enrichment and generated USD 2,021 million in revenue and USD 843 million in EBITDA. It employs around 16,133 people.

4. Other Operations: The Other operating segment comprises companies related to energy, railway, and shipping transportation. It contributed USD 483 million in revenue and EBITDA of USD 18 million in FY2019.
 

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.

 
(Source: Annual Report, Company Website)

Progress of Non-Financial KPIs in FY2019

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)

Recent Regulatory Updates – Strengthening the Financial Position

15^th May 2020: The Group will be organizing its annual general meeting on 16^th June 2020 at 11 AM London Time, at 2 Portman Street, London W1H 6DU.

29^th April 2020: The Company transferred 4,964,830 ordinary shares out of treasury to the Employee Benefit Trust for no consideration, as a part of Long-Term Incentive Plan.

20^th March 2020: For general corporate purposes, the Company secured an additional syndicated unsecured credit facility of USD 750 million, which will be maturing in 2025.


Top Shareholders Statistics 
 
 

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

On 30^th April 2020, EVRAZ released an update on the trading performance for the first quarter of the financial year 2020. The Group in the Q1 2020 reported an increase in the output by 3.2 per cent versus Q4 FY2019, driven by capital repairs completion at EVRAZ NTMK. 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. 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. 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. 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 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)
 
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. In the FY 2019 period, the company’s consolidated EBITDA stood at USD 2,601 million, bringing the EBITDA margin to 21.8 per cent.  

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. The group’s net debt reduced by USD 126 million in FY2019 to USD 3,445 million versus USD 3,571 million in FY2018. In 2019, the Board approved the payments of an interim dividend per ordinary share of USD 0.40, totalling USD 577.3 million, on 29 March 2019.
 
Financial Ratios – Strong Profitability Margins versus the Industry Median

 
(Source: Refinitiv, Thomson Reuters)

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 period. Reported profitability metrics were higher against 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’scurrent 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 0.53x.

Share Price Performance Analysis


Daily Chart as on 10^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 10, 2020, at the time of writing (before the market close, at 1:40 PM GMT), EVRAZ PLC shares were trading at GBX 303.50, down by 0.09 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 Approach (NTM)



To compare EVRAZ Plc with its peers, Price/Earnings multiple has been used. The peers are Castings Plc (NTM Price/Earnings was 26.42), Hill & Smith Holdings Plc (NTM Price/Earnings was 17.73), Polymetal International Plc (NTM Price/Earnings was 9.98), Kaz Minerals Plc(NTM Price/Earnings was 7.65) and United Company RUSAL Plc(NTM Price/Earnings was 1.72). The Average of Price/Earnings (NTM) of the company’s peers was 12.70x (approx.)

Method 2: Price/Cash Flow Approach (NTM)


To compare EVRAZ Plc with its peers, Price/Cash Flow multiple has been used. The peers are Polymetal International Plc (NTM Price/Cash Flow was 8.09), United Company RUSAL Plc (NTM Price/Cash Flow was 5.89), Kaz Minerals Plc (NTM Price/Cash Flow was 4.77), KGHM Polska Miedz SA (NTM Price/Cash Flow was 4.45) and Bushveld Minerals Ltd (NTM Price/Cash Flow was 2.54). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.15x (approx.)

EVRAZ Plc Vs FTSE 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, EVRAZ Plc share price has delivered 84.59 per cent returns as compared to negative 6.84 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 delivered a total return of 200.85 per cent in the last five years versus the total return of FTSE All share of 14.80 per cent for five years period.

Industry Outlook Dynamics

During 2019, the Global markets experienced economic and political uncertainties; however, the year was ended at a positive note with a positive trend in prices and steel demand. The consumption trend of steel, iron ore and coal can be seen in the image below:


(Source: Annual Report, Company Website)

As per the Grand View research report published recently in June 2020, the Global Iron Ore Pallets market is projected to surge by the compounded annual growth rate of 3.70 per cent from 2020 to 2027, which was valued at USD 47.63 billion in 2019. The key factor that will drive the market growth is the expansion of steel production in developing economies. Moreover, the growth in construction and automotive industries (being an end-user industry) will play a major role in shaping the industry in future.

Growth Prospects and Risk Assessment

The Company is amongst the top 30 steel producers and top 5 coal producers globally and has maintained a top-notch quality and at a lower cost. The Group sells its product to world-class customers, which include big giants from the steel industry. The Company is able to maintain an adequate capital allocation balance between a strong balance sheet, investment for growth and returns to shareholders. It has a well established internal control systems, which helps them to mitigate the risks associated with the working of the company. The Company operates inmultiple geographies, and its profits can be impacted negatively due to the 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 Operations of EVRAZ are quite dependent on the global macroeconomic conditions, economic and industry environment. In the first quarter of 2020, the coal priced stayed firm at an average level of around USD 150/t despite the supply disruption. However, the prices of steel and iron ore were affected by the weakening demand. To mitigate this risk, the Group is continuously expanding its product portfolio and penetrating into new markets. In 2019, the Company increased the coal mining volume by 8 per cent to 94.9 MT (million tonnes), and the US finished steel production grew by 2 per cent to 85.3 MT.  In Q2 2020, the Company anticipates that COVID-19 disruption will adversely affect the production of steel and pig iron in Russia. However, the Group has been consistently reducing its cash cost position across its steel plants and iron ore products, to stay resilient.

The Company has a lucrative market share by products in Russia, as shown in the picture below:

 
(Source: Annual Report, Company Website)

The pig iron production volumes are anticipated to increase in FY2020 slightly and total production volumes of 24 million tonnes is targeted for 2020. EVRAZ in FY2020 will focus on improving safety and other important areas for long-term development. The Company is well-positioned with sound business model and decent business growth trajectory. The Group 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.

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 fundamental prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 301.80 (as on 10^th June 2020, before the market close at 9:56 AM GMT+1), with lower-double digit upside potential based on 12.70x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 5.15x 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.

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