Steel_Vale_impact_Incorporating__watermark

Dec-YE

2016

2017

2018E

2019E

2020E

Income statement

Revenue

5,916

7,848

8,581

7,717

7,795

Underlying EBITDA

1,911

2,577

3,109

2,460

2,544

Underlying EBIT

1,569

2,174

2,710

2,061

2,130

Other items

294

-266

-137

0

0

Equity accounted income

14

10

12

6

6

Net interest

-160

-154

-108

-109

-166

Taxation

-97

-409

-483

-392

-394

Minority interest

1

1

0

0

0

To owners of the parent

1,621

1,356

1,994

1,567

1,576

Underlying earnings

1,268

1,547

2,073

1,567

1,576

Underlying EPS, USc

156

191

254

191

193

Thomson Reuters consensus EPS, USc

246

202

189

DPS declared, USc

124

187

264

182

193

Thomson Reuters consensus DPS, USc

211

164

143

Underlying EBIT, $mn

Resources - EBIT

282

678

845

1,076

893

EBIT margin - resources

24%

39%

45%

50%

44%

Russian steel - EBIT

1,315

1,493

1,914

1,009

1,257

EBIT margin - Russian steel

24%

21%

25%

15%

19%

Other - EBIT

-28

3

-50

-23

-21

Underlying EBIT

1,569

2,174

2,710

2,061

2,130

EBIT margin

27%

28%

32%

27%

27%

Income statement ratios

EBITDA margin

32%

33%

36%

32%

33%

EBIT margin

27%

28%

32%

27%

27%

EPS growth

167%

-17%

46%

-22%

1%

Dividend payout ratio

79%

98%

104%

95%

100%

Input assumptions

58

71

66

75

67

Iron ore fines (62% Fe, CIF China), $/t

Hard coking coal, $/t

144

188

206

178

161

Hot rolled coil - CIS, $/t

382

502

552

475

476

Cold rolled coil - CIS, $/t

434

559

615

580

583

RUB/$

67

58

63

67

68

Steel sales realisations, $/t

506

655

695

610

619

EBITDA per tonne, $/t

178

235

277

225

232

Capex/tonne, $

51.3

53.9

68.1

127.8

91.3

FCF/tonne, $

1.2

1.8

2.4

1.0

1.5

Utilisation rate

86%

87%

90%

90%

90%

Sales volumes, kt

Coking coal

827

200

359

738

1,077

Steam coal

2,030

1,583

1,312

1,500

1,500

Total coal

2,857

1,783

1,671

2,238

2,577

Iron ore pellets

6,028

6,514

6,578

7,720

7,915

Iron ore concentrate

120

131

827

768

1,251

Total iron ore

6,149

6,645

7,405

8,488

9,166

Semi-finished products

724

519

695

632

632

Rolled products

8,120

8,579

8,761

8,528

8,528

Downstream products

1,871

1,862

1,765

1,796

1,796

Total steel sales

10,715

10,959

11,221

10,956

10,956

Resources

Russian steel

31%

69%

Dec-YE

2016

2017

2018E

2019E

2020E

Balance sheet

Net operating assets

3,656

4,237

4,049

4,841

5,347

Investments

250

229

28

35

40

Equity

3,032

3,389

3,496

3,382

3,424

Minority interest - BS

15

15

14

14

14

Net debt (cash)

859

1,062

567

1,481

1,949

Balance sheet ratios

Gearing*

22%

24%

14%

30%

36%

Net debt to EBITDA

0.45x

0.41x

0.18x

0.60x

0.77x

RoCE

46%

53%

61%

43%

39%

RoIC (after tax)

28%

33%

41%

28%

26%

RoE

48%

48%

60%

46%

46%

Cash flow statement

Operating cash flow

1,578

2,107

2,740

2,180

2,156

Capex

-550

-591

-765

-1,400

-1,000

Other - CF

-89

-82

22

74

43

FCF

939

1,434

1,997

854

1,199

Equity shareholders' cash

864

1,347

1,921

767

1,066

Dividends and share buy backs

-918

-1,550

-1,426

-1,682

-1,534

Advances (repayments) of debt

-439

80

-323

600

577

Increase (decrease) in cash

-493

-123

172

-314

109

Cash flow ratios

Capex/EBITDA

29%

23%

25%

57%

39%

Cash conversion ratio

0.5x

1.0x

1.0x

0.5x

0.7x

FCF yield

9.3%

11.2%

15.0%

6.4%

8.7%

Equity shareholders' yield

9.4%

11.4%

15.1%

6.5%

9.0%

Working capital days**

48

46

39

41

41

Valuation

Calculation of target price (TP)

$mn

$/GDR

Resources

5,985

7.3

Russian steel

10,746

13.1

Other

130

0.2

Enterprise value

16,862

20.6

Financial instruments as at 31 December 2017

229

0.3

Net debt as at 31 December 2017

-1,062

-1.3

Minority interest

-15

0.0

Equity value

16,014

19.6

Plus: one-year forward equity shareholders' cash

1.0

Less: dividends paid

-1.8

Rounded to

18.7

Share price on 29/1/2019

14.5

Expected share price return

29.0%

Plus: expected dividend yield

12.6%

Total implied one-year return

41.6%

Share price range, $

12-month high on 10-10-2018

27.93

12-month low on 17-3-2017

17.17

Price move since high

-8.4%

Price move since low

49.0%

Calculation of discount rate

WACC

11.3%

Cost of debt

5.0%

Risk-free rate

4.0%

Tax rate

20%

Equity risk premium

7.0%

After-tax cost of debt

4.0%

Beta

1.30

Debt weighting

20%

Cost of equity

13.1%

Terminal growth rate

3.0%

Valuation ratios

Dec-YE, $mn

2016

2017

2018E

2019E

2020E

P/E multiple

7.3x

7.6x

6.1x

7.6x

7.5x

Dividend yield

10.8%

12.9%

16.9%

12.6%

13.3%

EV/EBITDA

5.3x

5.0x

4.3x

5.4x

5.4x

P/B

3.0x

3.5x

3.7x

3.5x

3.5x

NAV per share, $

3.74

4.18

4.27

4.13

4.18