Aug
22
Over January-July, Magnitogorsk Iron & Steel Works’ net income formed 1.031 bn USD under US GAAP report, above 2007 results by 19%, says company’s report, published on Wednesday. MMK’s revenue increased by 41%, to 5.653 bn USD over 1H 2008. EBITDA reached 1.5 bn USD (25% growth). January-June results demonstrates that a growth of steel production increased by 8.3%, to 7.015 th tons, roll production by 8.1%, to 6.434 th tons. Sales volume growth at domestic market formed 69%. A growth of products prices increased by 45% against 1Q results. The company also demonstrates an effective cost management, modernization of facilities, and high productiveness rate of labor and conduction of energy-saving measures.
First of all, it should be mentioned that the given results have met our forecasts by more than 90%. Thus, we see the published results as expectable. Regarding the dynamics, we can say that in spite of figures growth in 1H 2008, a slight fall of profitability had occurred. Thus, EBITDA margin decreased by 3.4 p.p. in comparison with last year results. Company’s net income margin has also decreased by 3.4 p.p. and operating income margin by 2.7 p.p. In spite of favorable trends of prices at commodity markets, a fall of effectiveness was caused by a growth of costs, with growth rates higher than sales prices. Moreover, if the company does not conduct effective cost management measures, a fall of profitability will become more significant.
It should be mentioned that MMK plans to decrease selling prices of its products by 5-7% in September-October 2008, which can be connected to conducted measures of Federal Antimonopoly Services in metallurgy and coal sectors. However, the company can also decrease the costs, due to compulsory decrease of coking coal prices in RF, allowing the company to save about 12 mn USD per month. Thus, we expect that company’s profitability will not decrease over 2H 2008. Meanwhile, at the back of growth expectations (by 60%), company’s forecasts demonstrate that EBITDA will hit 2007 results, which means that EBITDA margin losing about 10 p.p. (EBITDA margin formed 28% in year 2007). Though no evident reasons for such significant decrease are present.
We find published report o be neutral for MMK business value. After the results of comparable analysis have been renewed on par with DCF model – we have acquired a new fair price for company’s stock at 1.59 USD (previous price – 1.51 USD). The change is dictated first of all by changes throughout coal market (the state’s order to decrease the prices) and also the pessimistic expectations towards the company regarding full 2008 results. Though, taking into account the growth potential, backed by general fall of financial markets – rose considerably; thus we upgrade our fundamental recommendation up to “BUY” level.
MMK: GAAP financial report 1H 2008 - August 22, 2008 (PDF)
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