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ATON - RUSSIAN STEELMAKERS-Wait for the Dust to Settle Before Picking the Winners - Sep 3, 2012, SEVERSTAL.


A Stable Operator

We have reduced our target price by 20% to $11.80/GDR which offers 4% potential upside over the current price. We maintain our HOLD rating. A decision to sell lossmaking US and European units last year left Severstal in much stronger financial shape, making it the profitability leader among its Russian peers. However, the relative stability of its business is largely reflected in the share price, in our view, while we do not see any major growth triggers in the short to medium term.

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Second quarter results in line with expectations. Severstal's 2Q12 results were in line with our and consensus estimates both in terms of sales ($3.7bn) and EBITDA ($664mn). The bottom line was affected by a forex loss of $143mn and the

separation of the gold unit, which were the only factors pushing it below forecasts.

Ample financial liquidity to meet short-term debt obligations. Severstal and Evraz are the only two Russian steelmakers that have sufficient cash and undrawn credit to easily cover short-term debt commitments, thus avoiding any debt refinancing risk. Severstal had over $1.9bn in cash and nearly $840mn in available credit at the end of 2Q12, while its short-term debt repayment commitments stand at under $1.5bn.

Growth projects completed, gold is out - where will growth come from? Last year Severstal completed the second phase of the Columbus project and the modernisation of its Dearborn plant, which made it one of the lowest cost producers in the US. Apart from the Balakovo mini-mill (expected to produce its first steel in 2013, adding around 10% to steelmaking capacity), the rest of its growth programme is longer term and focused primarily on the mining business.

Maintaining a HOLD rating due to lack of short-term growth triggers. Although we expect Severstal to remain reasonably insulated against the deterioration in the steel market and to be among the leaders of the Russian industry, we see few short-term triggers that could help it transform that leadership into substantial earnings growth.

Our revised target price of $11.80/GDR offers just 4% upside from the current price. Hence, we maintain our HOLD rating on the stock.


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27 Pokrovka str., bld.6, 105062 Moscow, Russia

phone: (495) 777-66-77, (495) 228-38-99,
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Publication:Russian Banks and Brokers Reports
Date:Sep 4, 2012
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