Evraz Group (EVRAZ, Ba2(LT Corp.Family)/BB-/BB), Russia's second largest vertically-integrated steel producer (and No.1 in terms of domestic production), announced its H1 2008 financial and operating results. We find the financial figures released to be credit-positive (for more details about the company, please refer to our Corporate Bond Profile dated 29 May 2008).

 

At end-H1 2008, according to the company, own coal production provided for over 100% of Evraz’s steel production requirements. Iron ore production grew by 23% yoy to 11.3 mt (million tones) with iron ore self-coverage of 93%. Crude steel production grew by 13% yoy to 9.5 mt.

 

In H1 2008, Evraz demonstrated 78% yoy revenue growth (to USD 10.7 bn), thanks to growth in prices for steel products, production increases and consolidation of acquired business entities.

The credit standing of the company remained strong, with net debt/EBITDA increasing slightly to about 1.6x, based on the last twelve rolling months EBITDA (end-June 2007 - end-June 2008) compared to the 1.5x level at year-end 2007. Although net debt in H1 2008 increased by almost 65% (compared to end-2007), the net debt/EBITDA ratio increased only slightly thanks to the robust operating performance. Evraz generated a stable positive free cash flow (FCF) in H1 2008 amounting to USD 1.8 bn (compared to USD 1.4 bn in H1 2007). Given the management EBITDA forecast of USD 8 - 8.5 bn in FY 2008, we do not expect the company’s net debt/EBITDA to exceed the current level in FY 2008.

We would like to point out that, in line with our expectations, no “heavy handed” measures were applied in “Mechel” case. According to recent media announcements, the company will be fined RUB 790 mn (USD 33 mn) and forced to bring down the coal price by 15%. Let us recall, that on July 29, coming on the tails of the “Mechel” case, Russia's Federal Anti-Monopoly Service (FAS) initiated legal proceedings against Evraz and Raspadskaya (coal mining) alleging that both companies, exploiting their near monopolistic positions, breached anti-monopoly legislation and set artificially high coking coal prices in the domestic market. We expect the same “benign measures” for Evraz and Raspadskaya as for “Mechel” to be applied.

On the other hand, we are still cautious about the future decision of the FAS and the low trading activity on the Russian Eurobond market. We reiterate our hold recommendation for Evraz's bonds on a three-month horizon. Speaking of relative value investment, we recommend marketweighting Evraz due 2009 and particularly recommend to pay attention to the attractively priced issues due 2013 and 2018 that we recommend to overweight, valuing our positions against the JP Morgan’s ‘’RUBI Other Index’’. We also reiterate our relative value underweight recommendation for the 2015 bond.

Evraz’s key financial highlights: