Bullish outlook on NLMK ($NLMK)

Investment idea by DTI

SectorBasic Materials

Entry strategy

Price: market price
Stop-loss: under 142,8 rubble per stock
Take profit: 169 and 176 rubble per stock
Investment horizon: up to 2 months (until dividend cutoff)

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Company details

NLMK group is a vertically-integrated steel company. The company has a major market share, and has assets in Russia, Europe and the US.

Market capitalization of NLMK is approximately $15 billion. NLMK is headquartered in Lipetsk, Russia.

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Technical analysis (trading plan)


НЛМК торговый план $NLMK
Pic. 1. NLMK ($NLMK) trading plan. Source: TradingView.

$NLMK is forming a trend-continuation triangle figure. A weakening rubble gave it an upside impulse. Currently, the stock has retraced to the triangle's upper line. A further uptrend is expected, first to the 169 rubble per stock level, and then possibly to 176. The investment horizon is 2 months, which marks the period of dividend cutoff. Until then, investors have to decide whether they want dividends or the increased capitalization gains.

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Fundamental analysis

On April 24th the group reported on its Q1 2018 financial results. Year on year, revenues grew by 30%, due to a hike in steel prices and internal efforts on increasing operational effectiveness. EBITDA grew to a record of $812 million, while free cash flow grew threefold to $599 million, all of which were directed towards dividend payments. Q1 dividend yield on NLMK stock is 16%.

NLMK historically pays higher dividends than others in the industry and sector (see table 1). NLMK is also leading on various profitability indicators (see table 3).

НЛМК дивиденды
Table 1. NLMK ($NLMK) dividend yields. Source: Reuters.
НЛМК прибыльность
Table 2. NLMK ($NLMK) profitability ratios. Source: Reuters.

Despite its superior results, $NLMK trades at a lower P/E levels than its competitors (see table 3) and has lower debt burden (see table 4).

НЛМК оценка
Table 3. NLMK ($NLMK) valuation ratios. SourceReuters.
НЛМК закредитованность
Table 4. NLMK ($NLMK) debt burden ratios. Source: Reuters.

NLMK is considering acquiring ArcelorMittal's Belgian assets. If the deal comes through, it will open possibilities for further expansion of NLMK, which, since the middle of 2000s, has expanded its global presence largely through M&A activity.

However, NLMK faces risks in the form of the 25% steel tariffs imposed by Donald Trump. In the beginning of May, NLMK warned that it would have to exit American market if its slabs are not exempt from the rule. Currently, Argentina, Australia, Brazil, Canada, Mexico, South Korea, and the EU have all struck similar agreements.