At R13.3 bn (in-line), Q3 Ebitda rose 4x —volumes were up 39% y-o-y, realisations 19% y-o-y and lower costs. Ebitda margin was 60% vs. 50% last year, 63% in Q2. Other income fell 64% y-o-y as the 20% share buyback concluded in Oct 16; outflow on the buyback is $1.1 bn.
Pricing strength: Q3 realisations rose 15% q-o-q; NMDC has raised prices by 11-12% since December 16. Cumulative hikes since September 16 are ~40%; global prices up 58% since. Strong domestic steel production (+11% YTD) + higher ore exports (19 mt in Apr-Dec 16 vs. 3 mt last year) provide support. Expect FY18 prices at R2,230/t (spot R2,170); y-o-y growth of 15%. 1% change in prices impacts PAT by 1.2%.
Strong volume growth: Domestic volumes rose 36% y-o-y in Q3; export volumes grew 2x. Export duty for NMDC is 10%. 9M volumes are up 27%; we expect 25% growth in FY17, 6% in FY18. 1% change in volumes impacts PAT by 1.3%.
Bearish Global view: Citi’s team expects iron ore oversupply to intensify in 2017 with over 50mt of seaborne expansions and 10 mt of Chinese restarts 2017, though shutdown at Chinese induction furnaces and marginal improvement of steel demand in advanced economies should offset some of the oversupply.
Steel plant sale: The CCEA has approved sale of 3 mtpa steel plant. NMDC has spent R109 bn. Reports (FE) suggest government may not privatise the plant; only a JV partner would be inducted.
Neutral: Global prices are on an uptrend; while supportive for further hikes by NMDC, ability of steel producers to absorb an increase would come into play (steel prices are at import parity). NMDC trades at 11x FY18PE (peers at 8-12x); limited upside. Div yield (4%) offers support. Raise FY17-19 PAT by 11-57% on better prices, vols, delay of steel plant. Use DCF + PE (10.5x), roll from Mar to Sep 18. We rate NMDC as Neutral. New TP is R150 (was R130).
Valuation: We use a combination of DCF and PE vs. DCF to better capture earnings potential in addition to asset valuation. We have modeled DCF cash flows out to FY47 based on NMDC’s existing reserves and resources of 1.7 bn tonnes. We do not account for any terminal value due to lack of visibility on future reserves to arrive at our DCF-based target price of R150.
Risks: Based on our sensitivity analysis, every 1% change in prices we estimate would impact EPS by 1.2%; every 1% change in volumes impacts EPS by 1.3%. Upside risks that could result in the NMDC stock continuing to trade above our TP include: higher volumes, higher prices, additional reserves, and lower costs. Downside risks that could result in the stock continuing to trade below our TP include: lower volumes, lower prices, and higher costs.