Research Notes

The high prices for steel products at the end of last year enabled the Chelyabinsk Metallurgical Plant (ChMK) to greatly improve its financials. The company expects revenue of USD 2.477 bn and a net profit in 2007 of about USD 249 mn, a visible gain from the previous year’s results. The current favorable market conditions are conducive for the steelmaker to further improve its financial performance. The ongoing investment projects, which include plans for the implementation of rail production at the ChMK facility, should enable the company to dramatically boost revenues.

• The company has reported strong financials in recent years. As our estimates show, the company’s revenue has increased by 27% on average a year in the past two years, while its EBITDA have risen by 113% yearly. Net profit soared from USD 38.1 mn in 2005 to USD 248.4 mn targeted for 2007. The expected net margin of around 10% is a rather strong indicator for the metal industry. Revenue is likely to grow further in 2008 amid favorable conditions in the core markets.
• The Chelyabinsk Metallurgical Plant (ChMK) is the core unit of the Mechel steel division. The company has a complete production cycle and is Russia’s sixth largest metal producer. The company has a broad diversification of products, which it uses as a hedge against the risk of a possible weakening of a specific market segment.
• The company operates all stages of the metal process, which include coke, sinter, steel-smelting, electric steel and steel-rolling productions. The company also has a powerful complex of engineering services, which enables the company to maintain excellent cost control during all stages of metal production, from processing raw materials to the manufacturing of finished products.
• A Mechel investment program, effective from 2008-2011, stipulates investments of around USD 1.5 bn in production modernization and expansion. Of the total investment, USD 1.3 bn is to go to ChMK to double its output of continuously cast steel and scale up its production of flat-rolled steel for construction and machinery production purposes, which should enable the company to boost its revenues.

Our estimates shows that the fair value of Chelyabinsk Metallurgical Plant is around USD 894 per share, which implies an upside potential of 104% to the current stock valuations . We consider ChMK shares an attractive vehicle for investments.

Denis Gorev

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