MMK on May 20 reported its 1Q 2008 financial results, which fell short of market expectations. Quotations for MMK shares dropped 5.5% on MICEX amid the news. Despite revenue growth of 17%, MMK failed to fully cope with price hikes on raw materials. As a result, its EBITDA margin narrowed 6.1% y-o-y to 21.4% and its net margin was down 6.5% to 12.5%. Delays in cargo shipments from ports and a rise in the company’s inventories amid harsh weather conditions also impaired the company’s margins and revenue.
MMK 1Q 2008 financials, mn USD
| | 1Q 2008 | 1Q | Change |
|---|
| Revenue | 2169 | 1845 | 17.5% |
| Operating profit | 393 | 449 | -12.47% |
| Operating margin | 18.1% | 24.3% | |
| Net proift | 271 | 350 | -22.57% |
| Net margin | 12.5% | 19% | |
| EBITDA | 465 | 507 | -8.28% |
| EBITDA margin | 21.4% | 27.5% | |
Source: ÌÌÊ
We expect a further decrease in MMK’s margins soon amid rising iron ore raw material costs. The company’s current iron ore stocks are just enough to meet 20% of its total demand. On April 1, new iron ore raw material prices took effect, exceeding those in 1Q by 67%. As regards coking coal supplies, the situation is more favorable, as the company holds a controlling stake in the Belon company, which supplies 39% of MMK’s needs for coking coal.
As a major player on the CIS steel market, MMK is in a position to index its prices, simultaneously boosting its production levels, which should results in a steady revenue growth. However, high prices on main raw materials will likely continue to eat into the company’s margins and its cash flows, which may produce a negative effect on its market cap. On the other hand, we expect a downturn in prices for key raw materials in the ferrous sector in 12 to 18 months, in the face of investment programs being implemented by leading world producers of coal and iron ore, to eliminate raw material shortfalls in the sector.
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