On December 11 Mechel Group (RTS: MTLR) released its US GAAP January – September 2007 results. According to the report the company earned USD 706 mn net profit, which is 89.7% higher than last year. The revenue stands at USD 4.647 bn , which is 47.9% y-o-y growth, and EBITDA is USD 1.205 bn, which is 80.2% y-o-y increase. However, these robust financial results turned out to be below market expectations.
The major beneficiary and General Director of the Group, Igor Zyuzin says that Mechel's financial results improved due to "a steady rise in output of core products amidst favorable market conditions". Based on the information that was disclosed by the company at the conference call, some changes occurred in Q4 in the primary product sales markets. The average steel product selling prices slightly slipped, while coking coal prices increased. The company should be able to maintain the growth rate of key financial performance indicators that was observed in January-September, until the end of 2007.
Table 1. Mechel: key financials 9M2007 (USD, mn).
| | 9m 2007 | 9m 2006 | 9m 2007/ 9m 2006 |
| Revenue |
4647 |
3142 |
48% |
| Costs |
2830 |
2069 |
37% |
| Gross profit |
1817 |
1073 |
69% |
| Gross profit margin |
39.1% |
34.2% |
|
| EBITDA |
1205 |
669 |
80% |
| EBITDA margin |
25.9% |
21.3% |
|
| Net profit |
706 |
372 |
90% |
| Net margin |
15.2% |
11.8% |
|
Source: Company's data, FINAM estimates
Although Mechel has a third segment in its structure, the power segment, the company's major sectors are still Metallurgical and Mining. 9M07 revenue in the first segment reached USD 3.129 bn, 45% y-o-y growth, EBITDA was USD 594 mn, 46.7% y-o-y increase. The revenue in the mining segment amounted to USD 1.3 bn or 27% of the consolidated revenue. EBITDA in this segment is USD 654 mn, and saw 156.6% y-o-y increase. Therefore, the mining division is presently the most profitable for the company, because its efficiency is higher than the results of the metallurgical segment.
Due to the constant efforts of the company to expand the mining operations, and optimize production, Mechel achieved a 8% y-o-y increase in coal production and a 22% y-o-y surge in nickel output. Higher prices added extra profit that tripled 9M06 profit.
As part of its strategy aimed at increasing the share of high value added products, Mechel reduced production of billets and ramped up output of hardware. Another noteworthy item, Mechel has a capex program designed to increase the profitability of the segment. This program is intended to raise the share of high value added products and reduce costs by modernizing production facilities and push down consumption ratios. Implementation of this program would further improve the efficiency of metal production.
Revenue in the power segment of the group stands at USD 251.5 mn, or accounts for 5.4% of consolidated net revenue. EBITDA in this segment saw a 92.4% y-o-y increase to USD 11.8 mn. Net loss in the segment is USD 11.1 mn. This is a result of the interest paid on an internal group loan, that was arranged for Mechel's subsidiary, Mechel-Energo (it consolidates the group's power business) by the other companies of the group. The company believes that in the near future this segment will improve its financial performance. We agree with this opinion, taking into account the fact that the company should be able to considerably reduce the costs in this segment, because thermal coal is to be supplied by the group's subsidiary, the Southern Kuzbass Coal Co.
Additionally, Mechel officially announced at the conference call that it plans to consolidate its mining assets into a standalone company, and to list its shares. This news will become an additional price driver for the shares of Southern Kuzbass Coal Co (RTS: UKUZ), because, in our opinion, this is the company that will become the hub of the consolidated company.
We are upbeat on the company's results. We believe that Mechel maintain the pace of growth achieved in 9M07 until the end of the year because we do not anticipate any serious changes in markets conditions in Q4.
Presently, we do not have any official recommendations for Mechel. However, based on average industry multiples, the fair value of this stock is approximately USD 23.50, which is slightly below the current market price.
0.553
1.6
