Research Notes
NLMK: Focus on Higher Value-Added Products
| 02.04.07 |
NLMK: Focus on Higher Value-Added Products
The year 2006 turned out to be quite an active one for Novolipetsk Iron & Steel Works (NLMK) in terms of M&As. The company snapped up raw material assets enhancing the group's vertical integration and also companies which manufacture higher value-added products. At the same time, the major set up JVs with foreign concerns which expand its opportunities on external markets. We are upbeat about the metal giant's actions, as they are in line with the corporate strategy geared towards boosting low-cost production of quality slabs for further production of higher value-added items at rolling facilities acquired on primary sales markets. We believe that this area of business expansion will push up the metal major's market cap in the future.
In 2006 NLMK acquired raw material assets (with Altai-Koks being the largest of them) which enhance the company's vertical integration.
A JV established by NLMK with Duferco should help the Russian concern to expand its presence abroad, primarily in Europe.
VIZ-Stal's takeover by NLMK made the latter a monopoly in Russia and a global transformer steel champion.
Execution of the second stage of the company's technical retooling program in 2007-2011 should produce a positive impact on its performance. Its implementation is expected to boost steel output 40% to 12.4 mln tons a year and ramp up iron ore concentrate production at Stoylensky GOK (the key ore supplier of NLMK) from 12.5 mln tons to 15 mln tons.
We added to our DCF model the results achieved by Dutch firm DanSteel (earlier it was listed on the balance sheet of another company controlled by Vladimir Lisin, but in early 2006 it was assigned directly to NLMK's balance sheet), VIZ-Stal and Altai-Koks. In particular, their aggregate contribution to the company's revenue amounted to over $1 bln.
Notwithstanding consolidation of new assets on NLMK's balance sheet, we expect to see the company's profit margins remain strong.
In line with our calculations, the fair price of the company's common share is $3.30 or 16% above the current market price. Our recommendation on the stock is Buy.
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Sectors: Metals, Ferrous MetalsCompany: Novolipetsk Steel