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Norvik Research 09.03.2017

09/03/2017 19:02

Global developments

The Euro strengthened while European bond yields rose in response to fairly hawkish comments by the ECB President Draghi. Following the widely expected decision to keep policy rates on hold, he observed that the balance of risks to growth in the region has improved. The euro surged 0.6% against the dollar to 1.061 before settling at 1.059. German 10-year Bund yields are 4 bps higher at 0.42%. US 10-year Treasury yields are 1 bp higher at 2.57%. European equities are marginally lower. S&P 500 futures are flat. The DXY dollar index is 0.2% lower after rising 0.3% yesterday.

Oil prices slumped yesterday amid rising concerns that OPEC’s output cuts may not offset increasing the US shale oil production. Crude oil stockpiles in the US rose 8.2 mn bbl in the previous week to the highest level since 1982. Brent prices declined 5.0% yesterday and are 2.0% lower today at $52.1/bbl.

Russia and CIS area developments and market colour

Russia’s inflation in February declined to 4.6% YoY, from 5.0% in January. The outturn was in line with market consensus. Officially measured core inflation fell to 5.0% YoY from 5.5% in January. Food price inflation fell to 3.7% YoY from 4.2% while non-food goods inflation fell to 5.7% from 6.3%. Inflation dynamics continued to benefit from the strength of the exchange rate and subdued consumer demand. CBR officials acknowledged recently that inflation performed below their expectations in February. The gap between headline inflation and the key rate (10.0%) is now 540 bps; most market players now expect considerably more dovish comments from CBR at the meeting on 24 March paving way to a policy rate cut in Q2.

Inflation returned to zero in the week to 6 March, pointing to a decline in year-on-year inflation to 4.5%, from 4.6% previously.

The rouble is 0.8% weaker today at 59.3 versus USD, reflecting oil prices dynamics. OFZ yields are 2-5 bps wider today. Russia’s and Kazakhstan’s Eurobond yields are 5-6 and 8-9 bps wider respectively.

Corporate news

Novolipetsk Steel PJSC (NLMK) published disappointing financial results for 4Q 2016 and presented a new company strategy until 2022. Sales went up 12% QoQ to $1.97 bn, 7% lower than market consensus. EBITDA fell by 23% QoQ to $518 mn. Net income contracted 20% during the same period. However, a commodity price recovery and higher production efficiency have contributed to EBITDA margin reaching 26% in 4Q 2016, from 20% in 4Q 2015.

The size of dividends at RUB 3.38 per share ($0.58 per a GDR) paid out to investors was surprisingly high. Dividends may reach as much as RUB 20.2 bn ($347 million) which would represent 83% of free cash flow and 97% of net income (if taken together with previously paid dividends).

With regards to operational results, production reached 15.93 million tons (+1% compared to 2015). This result was achieved due to higher global steel consumption, which rose 0.5% compared to 2015. The main factors contributing to higher consumption were higher demand in the developed markets, as well as slower contraction in Russia (moderating from -8% YoY in 2015 to -4% YoY last year). Notably, Russia, Europe and North America are by far the biggest markets for NLMK, accounting for 72.3% of sales.

We believe that, on the basis of improving prospects for growth recovery in the company’s core markets (Russia, the Eurozone and the US), demand should strengthen allowing NLMK to post solid financial and operational results for this year.

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