Sector: Metals
NLMK's consolidated financial report for 1H 08 shows a quick upturn in the company's financial indicators, but a downturn in margins due to the consolidation of less profitable Maxi Group assets and an outrunning growth in cost of production. However, NLMK remains the most profitable Russian steelmaking company, while a potential decrease in domestic coal prices could have a positive impact on the steelmaker's profits in 2H.
On August 26, Novolipetsk Steel (NLMK) published its 1H 2008 consolidated financials. Although the company showed very strong financial indicators, its margins went down against an upturn in cost of production, which grew by 79.7% y-o-y in the reporting period and thus outran the steelmaker's revenue indicator, which rose by 63%.
Table 1. NLMK: Financials 1H 2008, USD million
| | 1H 2008 | 1H 2007 | 1H 2008/1H 2007 |
|---|
| Revenue | 5,883.6 | 3,609.1 | 63% | | Gross profit | 2,649.2 | 1,748.2 | 52% | | Gross margin | 45.03% | 48.44% | - 3.41 p.p. | | EBITDA | 2,315.6 | 1,581.9 | +46.4% | | EBITDA margin | 39.36% | 43.83% | -4.47 p.p. | | Operating profit | 2,069.7 | 1,384.1 | 50% | | Operating margin | 35.18% | 38.35% | - 3.17 p.p. | | Net profit | 1,530.8 | 1,065 | 44% | | Net margin | 26.02% | 29.51% | -3.49 p.p. |
Source: NLMK, Finam estimates
The outrunning growth in cost of production was primarily caused by the absence of coal assets in the NLMK business structure. We note that Maxi Group's segment showed an increase in revenue in 1H 08, while in 1Q 08, the asset inflicted a loss on NLMK. This was caused by a surge in prices for the segment's products as compared to prices for the scrap metal used as an input material.
We expect the increase in the company's revenue to slow down in 2H; however, a decrease in domestic coal prices, scheduled by the government, may help NLMK, which does not have its own coal assets, to preserve its margins at a high level.
We recommend that investors Hold NLMK shares with a target price of USD 4.05 per share. Sulinov Aleksey
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NLMK
Capitalization: $5 333 972 243,60
Common shares:
Price: $0,89
Delta week: 29,0%
Delta month: -6,3%
Delta year: -77,8%
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0.569
0.073
