Research Notes
Severstal: implications of aggressive expansion
| 05.06.09 |
We resume coverage of Severstal, the world’s 14th largest steelmaker, with a global market share of about 1.45%. As the crisis unfolds, Severstal shareholders are paying the price for the company’s aggressive expansion policy, which now affects its results. However, we believe that the company is now undervalued on the market, even accounting for the impact of negative scenarios.
We think that current market price of Severstal is close to the fundamental value, even considering 30% discount to the replacement cost of its steel assets.
Upside drivers:- Expansion of steel exports: Production costs in Russia give the steelmaker a competitive advantage and enable it to maintain capacity utilization at its lucrative Russian division at a relatively high level by stepping up exports to European and Southeast Asian markets.
- Anti-crisis program: Severstal has announced a package of anti-crisis measures, which should allow the company to operate under complex industry conditions. Of particular importance are the partial conservation of US-based assets and the optimization of expenses at all of the company’s subdivisions. Negative factors:
- Declining competitive advantage on production costs: The effect of the ruble devaluation has weakened since January-February, which has negatively affected production costs in dollar terms. A decrease in global contract prices for raw materials may also hurt the competitive advantage of Russian steelmakers in terms of production costs.
- Unprofitable international division: Amid complex market conditions, the company’s international division has been operating below breakeven point on EBITDA, while the optimization of production at its oversees assets is complicated by labor union activities.
- Significant leverage: As of March 31, 2009, the company had total debts of more than USD 7.5 billion and a net debt of USD 4.8 billion. According to our estimates, the steelmaker’s 2009 EBITDA will not cover its debt servicing costs.
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Sectors: Metals, Ferrous MetalsCompany: Severstal