On October 3, Mechel Group (RTS: MTLR) released H107 financials. According to the report, the company generated $489.45 mln in net profit under US GAAP. This is 2.7-fold higher than in the year-earlier period. Sales amounted to $2.98 bln (up 55%) in the reporting period and EBITDA to $814 mln (up 2.36-fold). These indicators expanded in line with market expectations. For this reason, Mechel's stock valuations remained flat.
Mechel ramped up rolled product output by 11% y-o-y to 2.527 mln tons, steel by 4% to 2.987 mln tons and cast iron 8% to 1.865 mln tons. Nickel output climbed 20% to 8,400 tons in the reporting period. Coal production advanced 10% to 8.87 mln tons, with a 6% decline in coking coal production to 4.223 mln tons and a 29% rise in thermal coal output to 4.647 mln tons.
Revenue in the group's mining segment amounted to $897.8 mln or 30.1% of consolidated sales. EBITDA in this segment jumped 3.06-fold to $449.7 mln. Conditions on the coal and iron ore markets are currently favorable and we expect this trend to remain in place in H207. Given that the company continues to boost output in line with the 2007 production target, we could see fairly good margins in the mining segment in FY07.
Sales in the metal segment reached $2.1 bln, which corresponds to 69.9% of consolidated net sales. EBITDA in the segment nearly doubled (up 98.1%) to $392.7 mln. The company boosted high value-added goods output, which strengthened margins in the segment. In late 2007, we could see weaker demand on the metal product market due to a seasonal factor. However, Mechel's wide product range and a limited price correction suggest upbeat FY07 results in the segment. Stronger sales were therefore achieved thanks to incremental output and favorable market conditions.
Mechel's H107 headline financial indicators, $ mln
| | H107 | H106 | H107/H106 |
| Revenue |
2,987 |
1,927 |
55% |
| COGS |
1,761 |
1,319 |
34% |
| Gross profit |
1,225 |
608 |
102% |
| Gross profit margin |
41.0% |
31.5% |
|
| EBITDA |
814 |
345 |
136% |
| EBITDA margin |
27.2% |
17.9% |
|
| Net profit |
489 |
182 |
169% |
| Net profit margin |
16.4% |
9.4% |
|
Source: Company data, Finam estimates
Revenue outpaced COGS in Q107. As a result, the company's gross profit more than doubled from $608 mln to $1,225 mln and gross profit margin advanced nearly 10% from 31.5% to 41%. Efficient control over non-operating costs, in turn, enabled Mechel to raise EBITDA 2.36-fold, with EBITDA margin strengthening from 17.9% to 27.2%.
Overall, based on the company's H107 financials and market conditions, we are upbeat on Mechel's FY07 outlook.
Based on average industry multiples, the fair price for Mechel should be $25.20 per share, which implies 36% upside to the current market valuations.
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