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Norvik Research 20.03.2017

20/03/2017 18:04

Global developments

Global stocks are weaker amid falling oil prices. S&P 500 futures are 0.1% lower, Eurostoxx 600 is 0.2% down. The dollar DXY index is unchanged. US 10Y treasury yields rose 1 bp to 2.51% after Friday's drop to a 2-week low.

Oil prices declined on the back of rising drilling activity in the US. Baker Hughes active rotary rigs count jumped by 14 to 631. Brent prices are 1.0% lower at $51.3/bbl.

Russia and CIS area developments and market colour

S&P on Friday raised the outlook on Russia’s sovereign rating from neutral to positive on favourable growth outlook. S&P affirmed Russia’s credit rating at BB+, one notch below investment grade, and stated that it may upgrade the rating if the Russian economy continues adapting to low oil prices environment while maintaining a relatively low government debt level.

Russia’s industrial production data for February came out significantly worse than expected. Output declined 2.7% YoY compared to a Bloomberg consensus forecast of 1.3% YoY growth, following 2.2% YoY expansion in January. According to Rosstat’s estimates, in seasonally- and work day-adjusted terms, IP in February declined 1.5% MoM after a 0.7% increase in January. The mining and quarrying output did not change on a YoY basis in February after a 3.3% YoY increase in January, led by gas extraction (+12.1% YoY), coal production (+2.9% YoY). Manufacturing output slumped 5.1% YoY, after a 2.0% YoY growth in January, partly due to the negative calendar effect.

The rouble is 0.6% weaker today at 57.5 versus USD, reflecting oil prices dynamics. OFZ yields are 3-4 bps tighter today. Russia’s and Kazakhstan’s longer term sovereign yields are 1-2 and 6-7 bps tighter today.

Corporate news

UC Rusal, a leading aluminium producer, published financial data for 2016. The results were broadly neutral, taking into account tough market conditions in the aluminium industry during the first half of 2016 when aluminium prices reached multi-year minimums. Net income rose 2.1 times to $1,18 bn. This result was achieved due to lower financial expenses, as well as a substantial increase in the share of profits of associated entities and joint ventures from $368 mn in 2015 to $848 mn last year.

Other financial parameters were slightly worse than in 2015. Sales went down by 8% to $7,983 bn as average aluminium prices on LME declined 3.5% from $1663 per ton to $1604 per ton, while average realized premium to LME price fell 43.4%. Adjusted EBITDA last year was also lower on a year-over-year basis at $1,49 bn (-26.1% YoY). EBITDA margin decreased from 23.2% in 2015 to 18.7% last year. Notably in 4Q 2016 EBITDA margin stood at 20.3% compared to 16.5% in 2015. The improvement of financial results during the second half of 2016 was driven by more favourable market conditions, as well as higher operational efficiency.

The favourable performance of 2H 2016 is expected to continue in 2017. The company forecasts that global aluminium demand will increase by 5% in 2017 compared to last year and reach 62.7 mn tons. Stable market conditions should contribute to aluminium deficit amounting to 1.1 million tons versus 0.7 million tons in 2016. Rusal’s 5-year Eurobond issued in January 2017 with a coupon of 5.125% is trading with YTM at 5.157% and Z-spread of 306.1 bps.

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