Research Notes

Strong financial showings posted by Severstal in the first half of 2007, as well as our revision of short- and long-term forecasts for steel rolled products, allowed us to adjust our valuation model for the company, increasing our fair price for Severstal's securities from $14.30 to $23.33. Since our fair price, however, is slightly above the metal major's current stock valuations, we assign a Hold recommendation to the metal giant's stocks.

In H107, Severstal improved its headline financial dramatically: sales surged 32% y-o-y, EBITDA soared 61% and net profit skyrocketed 135%. The favorable market environment produced a substantial impact on the company's financial performance.

Also, we had to make adjustments to our valuation model owing to the revision of our forecasts for rolled product prices on the domestic and foreign markets. We expected steel prices to decline in Q3 and Q4, but current conditions on the steel market show that prices will start sliding no earlier than Q208.

From 2006 through 2012 Severstal has planned to considerably increase capital outlays in order to upgrade its assets (while a year ago Severstal intended to allocate some $6.9 bln to these activities, this year the metal major revised its target for capital outlays up to $10 bln). Longer term, this should produce a positive impact on the metal maker's operating and financial indicators.

Further efforts to diversify the company's activities (to be more precise, investments in gold assets that could be spun off into a standalone division at a later time) could push up its stocks. Also, in the near future Severstal could act to take over Celtic Resources (22% of which is already in the hands of Alexey Mordashov). Provided that gold prices go up in the future, these investments of Severstal could yield handsome returns in coming years.

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Denis Gorev

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