In aluminium we trust!

Transcription

1 In aluminium we trust! Recommendation: BUY Target NOK 55 (48) Prepared by Analyst: Daniel Johansson, Fondsfinans AS, tel: , This report was prepared by an analyst engaged by Fondsfinans AS, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. See page 12 of this report for Important Disclosure Information. 1

2 4Q14 Much better than expected, with great potential! INVESTMENT CASE Softer seasonality aside 4Q was indeed a record quarter, and... - A record quarter as revenues grew 31%, and as underlying EBIT tripled y-o-y - Recovery is multifaceted; helped by prices, costs and FX in upstream units - Importantly B&A turned into a profit while Primary had a record high profit... while near term outlook is soft, the right fundamentals are in place... - Near term risks amid low LME prices, weak downstream fundamentals, and higher costs in B&A while realised premiums, FX, energy prices are up - The aluminium markets remains in deficit, and the structural demand is improving... and so is strong DPS, FCFP, and we thus reiterate our BUY rating - The NOK 1.00 DPS is some NOK 0.20 above the market, i.e. Adding confidence - We have hiked our E est s by 8-11% on EBIT and upped our DPS - On a USD/NOK at 7.65 our mid-cycle margin SOTP price target goes to 55 (48) 2

3 A record strong 4Q, and on the right lines as well as... ESTIMATES/SENSITIVITIES Quarterly B&A and Primary EBIT (NOK m) Annual underlying EBIT and (NOK m, %) 2,500 2,000 1,500 1, ,989 1, ,000 12,000 10,000 8,000 6,000 4,000 2, % 10.0 % 8.0 % 6.0 % 4.0 % 2.0 % 0.0 % EBIT Bauxite & Alumina EBIT Primary Aluminium Underlying EBIT Adj. EBIT margin The main beat was in upstream activities, which is good news! - Primary EBIT was record high and Hydro B&A returned to profit - Energy and metal markets were solid, Rolled weak Source(s) : Hydro, Fondsfinans research We continue to see a solid EBIT improvement in E - This partly due to factors like FX, e.g. given substantial gains y-o-y while demand and operational improvements are key drivers too Source(s) : Hydro, Fondsfinans research 3

4 ... upstream activities/energy did well (downstream worse) DEVIATION TABLE Quarterly underlying EBIT by segment Underlying EBIT (NOKm) 4Q13 1Q14 2Q14 3Q14 4Q14 FF est. Diff. % Cons.* Diff. % Bauxite & Alumina % % Primary Metal ,216 1,989 1, % 1, % Metal Markets % % Rolled Products % % SAPA JV (part of Other) % n/a n.m. Energy % % Other & eliminations % % Underlying EBIT ,490 2,886 1, % 2, % *SME-Direkt Source(s) : Hydro, Fondsfinans research 4

5 Assumption changes are minor (mainly on volumes/fx)... KEY ASSUMPTIONS AND CHANGES Key assumptions current E 2016E 2017E Realized Aluminium Price (USD/t) 1,698 2,113 2,475 2,071 1,898 1,854 2,006 2,175 2,150 Average Alumina Price (USD/t) n/a Realized Premium Above LME n/a Average Electricity Price (NOK/kWh) Aluminium cash cost (USD/t) 1,675 1,750 1,988 1,791 1,540 1,478 1,527 1,605 1,606 Alumina cash cost (USD/t) n/a Primary Aluminium Production (kt) 1,397 1,415 1,981 1,985 1,944 1,958 2,014 2,035 2,035 Alumina Production (kt) 2,090 1,976 5,264 5,793 5,377 5,933 5,998 6,020 6,020 Pow er Production (GWh) 7,897 8,144 9,581 10,308 10,243 10,205 10,000 10,000 10,000 Metal Market External Sales (kt) 1,448 1,717 2,091 2,470 2,383 2,642 2,634 2,456 2,419 Rolled Products External Sales (kt) USD/NOK Average Key assumptions, changes E 2016E 2017E Realized Aluminium Price (USD/t) 0 % 0 % 0 % 0 % 0 % 0 % -4 % -2 % -3 % Average Alumina Price (USD/t) 0 % 0 % 0 % 0 % 1 % -1 % -2 % Realized Premium Above LME n.m. n.m. 0 % 0 % 0 % 0 % 11 % 2 % 0 % Average Electricity Price (NOK/kWh) -2 % -1 % 0 % 0 % 0 % 4 % -2 % 0 % 2 % Aluminium cash cost (USD/t) 0 % 0 % 0 % 0 % 0 % 0 % -1 % 0 % -1 % Alumina cash cost (USD/t) 0 % 0 % 0 % -3 % -7 % -3 % -2 % Primary Aluminium Production (kt) 0 % 0 % 0 % 0 % 0 % 0 % -2 % 0 % 0 % Alumina Production (kt) 0 % 0 % 0 % 0 % 0 % 0 % 1 % 1 % 1 % Pow er Production (GWh) 0 % 0 % 0 % 0 % 2 % 3 % 2 % 2 % Metal Market External Sales (kt) 0 % 0 % 0 % 0 % 0 % -1 % -1 % -4 % -4 % Rolled Products External Sales (kt) 0 % 0 % 0 % 0 % 0 % -2 % -2 % -2 % -2 % USD/NOK Average 0 % 0 % 0 % 0 % 0 % 0 % 13 % 13 % 13 % 5

6 Estimate changes mainly in Primary (on an absolute basis) ESTIMATES ASSUMPTIONS Estimates changes table Estimates changes 2015E 2016E 2017E Change NOKm Curr. Prev. Curr. Prev. Curr. Prev. 2015E 2016E 2017E Underlying EBIT 10,449 9,424 12,314 11,379 11,541 11, % 8 % 0 % - Bauxite & Alumina 2, ,179 1,797 1,988 1, % 21 % 5 % - Primary Metal 5,498 5,911 7,137 6,576 6,709 6,561-7 % 9 % 2 % - Metal Markets % 16 % 15 % - Rolled Products % 6 % 7 % - Energy 1,199 1,134 1,345 1,309 1,345 1,309 6 % 3 % 3 % - Other & eliminations n/a n/a n/a EPS underlying % 10 % 7 % Source(s) : Hydro, Fondsfinans research 6

7 Price target to NOK 55 (48); a 21% upside supports a BUY VALUATION - SOTP SOTP (historical adjusted, mid-cycle, multiples etc.) (NOK, NOK m, %) Valuation - SOTP Margin Capacity NOK/USD EBITDA Multiple Total Per share Bauxite & Alumina - ow n production (mid-cycle) , , Bauxite & Alumina - sourced (mid-cycle) , Primary Metal, ow n production (mid-cycle) , , Primary Metal, Qatalum (mid-cycle) , , reduction due to Pow er contracts , Metal Markets, 2015E , Rolled Products 1, , , Energy (production 9.4 Tw h), full value 1,367 NOK 2.75/Kw h 26, SAPA JV (Hydro-Orkla 50/50) 8.0 8, Other & eliminations , Other assets incl. Solar Net IB debt Minority interest (mainly Albras (51%), Slovalco (55%)) -5, Debt adjustm. (debt equity investments, pension, other) -23, Equity value 112, EV/EBITDA, implicit 9.8 Upside/(downside) 20.5 % Source(s) : Hydro, Fondsfinans research 7

8 In sum: A rock-solid quarter, near term risks nothing major ESTIMATES - SUMMARY Key figures (NOKm) E 2016E 2017E 4Q13 3Q14 4Q14 Revenues 65,359 79, , , ,796 16,507 20,130 21,948 EBITDA underlying 7,120 10,212 15,576 17,182 16,406 1,578 2,615 4,170 EBIT underlying 2,737 5,694 10,449 12,314 11, ,490 2,886 PTP ,120 9,296 10,883 10, EPS reported EPS underlying Op.CF / share (Op.CF - capex) / share EBITDA* margin 10.9 % 12.9 % 14.0 % 15.6 % 15.1 % 9.6 % 13.0 % 19.0 % EBIT* margin 4.2 % 7.2 % 9.4 % 11.2 % 10.6 % 2.9 % 7.4 % 13.1 % DPS Dividend yield (%) 2.5 % 2.2 % 2.4 % 2.6 % 2.2 % EV/EBITDA underlying EV/EBIT underlying P/E underlying P/B ROE -2 % 2 % 5 % 10 % 11 % ROCE 4 % 7 % 12 % 12 % 11 % ROIC -3 % -1 % 4 % 5 % 5 % NIBD/EBITDA Q a record quarter, strong on the right lines while near term matters are of minor importance for the case Despite the share rerating we continue to see solid upside, reiterating our BUY 8

9 Accounts summary ESTIMATES - SUMMARY P&L E 2016E 2017E 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E Revenues 78,247 65,359 79, , , ,796 16,364 16,174 16,314 16,507 18,454 18,540 20,130 21,948 28,528 27,582 27,872 27,021 Revenue grow th (YoY) -20 % -16 % 21 % 40 % -1 % -1 % -25 % -26 % -13 % 5 % 13 % 15 % 23 % 33 % 55 % 49 % 38 % 23 % EBITDA, underlying 6,128 7,120 10,212 15,576 17,182 16,406 2,165 1,624 1,753 1,578 1,861 1,566 2,615 4,170 3,565 3,674 4,103 4,235 EBITDA margin (%) 8 % 11 % 13 % 14 % 16 % 15 % 13 % 10 % 11 % 10 % 10 % 8 % 13 % 19 % 12 % 13 % 15 % 16 % EBIT, underlying 1,252 2,737 5,694 10,449 12,314 11,541 1, ,490 2,886 2,158 2,417 2,868 3,006 EBIT margin (%) 2 % 4 % 7 % 9 % 11 % 11 % 7 % 3 % 4 % 3 % 4 % 3 % 7 % 13 % 8 % 9 % 10 % 11 % Pre-tax profit ,120 9,296 10,883 10, ,998 2,101 2,531 2,666 Pre-tax margin (%) 0 % -1 % 3 % 8 % 10 % 10 % 3 % -6 % 2 % -5 % 5 % 2 % 4 % 0 % 7 % 8 % 9 % 10 % Net profit -1, ,228 6,786 7,945 8, ,458 1,533 1,848 1,946 Net margin (%) -2 % -1 % 2 % 6 % 7 % 7 % 2 % -4 % 2 % -5 % 3 % 1 % 3 % -1 % 5 % 6 % 7 % 7 % Balance E 2016E 2017E 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E Cash and cash equivalents 7,034 8,408 9,253 9,140 13,490 15,901 6,410 7,399 8,396 8,408 6,476 6,617 6,045 9,253 10,091 7,859 8,344 9,140 Other current assets 23,125 22,309 26,674 29,332 29,024 29,639 24,354 21,253 22,370 22,309 24,121 23,184 23,705 26,674 30,287 29,702 29,834 29,332 Property, plant & equipment 52,208 50,670 55,719 56,690 56,156 55,774 54,569 52,889 51,292 50,670 52,559 54,041 51,630 55,719 55,959 56,201 56,445 56,690 Other non-current assets 34,186 33,844 34,626 34,626 34,626 34,626 37,080 37,673 33,479 33,844 32,568 32,805 32,895 34,626 34,626 34,626 34,626 34,626 Total assets 116, , , , , , , , , , , , , , , , , ,789 Short-term interest bearing liabilities 5,956 6,194 6,039 6,039 6,039 6,039 5,324 5,786 6,201 6,194 6,255 6,141 5,007 6,039 6,039 6,039 6,039 6,039 Long-term interest bearing debt 21,760 18,676 25,539 21,591 19,843 19,756 18,225 18,361 18,414 18,676 18,586 19,806 20,681 25,539 24,252 23,165 22,278 21,591 Other short-term liabilities 11,566 12,687 13,077 16,504 16,268 16,907 16,210 15,188 11,567 12,687 12,075 11,544 11,493 13,077 18,095 17,323 17,222 16,504 Other long-term liabilities 3,427 2,411 1,676 1,676 1,676 1,676 3,898 3,468 3,256 2,411 2,833 2,894 2,496 1,676 1,676 1,676 1,676 1,676 Total liabilites 42,709 39,968 46,332 45,810 43,826 44,379 43,657 42,803 39,438 39,968 39,749 40,385 39,676 46,332 50,062 48,204 47,216 45,810 Equity 73,844 75,263 79,941 84,477 89,968 92,060 78,756 76,411 76,099 75,263 75,976 76,262 74,600 79,941 81,399 80,683 82,531 84,477 Equity share (%) 63 % 65 % 63 % 65 % 67 % 68 % 64 % 64 % 66 % 65 % 66 % 65 % 65 % 63 % 62 % 63 % 64 % 65 % NIBD 20,682 16,462 22,325 18,490 12,393 9,894 17,139 16,748 16,219 16,462 18,365 19,330 19,643 22,325 20,200 21,345 19,974 18,490 Cash flow E 2016E 2017E 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E Cash earnings 4,665 3,605 5,999 12,315 13,478 13,542 1, , ,579 1,373 1,787 1,260 2,843 2,917 3,229 3,326 Operating cash flow 5,435 5,126 6,033 13,083 13,551 13, , , ,179 1,151 4,454 4,248 2,729 2,997 3,108 Net CAPEX -3,731-3,183-1,674-3,181-6,500-5, ,047-1,625-1,625-1,625-1,625 Free cash flow after investments 1,704 1,943 4,359 9,902 7,051 8, ,655-1, ,407 2,623 1,104 1,372 1,483 Net debt repayments 934 2, ,376-3,948-1, ,287-1, Equity issue / dividends -1,693-1,669-1,678-1,922-2,250-2, , , , Free cash flow 1,704 1,943 4,359 9,902 7,051 8, ,049 1, , ,710 1,336-2,

10 We rate NHY as MEDIUM risk RISK ASSESSMENT Aluminium prices: Hydro s revenues are exposed to market prices of aluminium. Our estimates and valuations are based on LME forward prices. The actual price development may however differ substantially from these assumptions Currency exchange rates: Hydro is exposed to numerous currencies. The company is highly exposed to USD on the revenue side. This is to some extent balanced through currency derivatives. However changes in the USD/NOK and USD/EUR are likely to have an impact on the company s earnings HSE: Hydro s activities involve Health, Safety and Environment risk. Serious accidents or pollution could cause financial liabilities and loss of business opportunities 10

11 Share information Share data Shareholders Share data Sector Metal Reuters/Bloomberg NHY.OL / NO Risk rating Medium Outstanding shares (m) 2,040 Market cap (NOKm) 93,432 Net int. bearing debt* (NOKm) 7,572 Enterprise value (NOKm) 101,004 Free float 65 % Average volume (mill) 4.5 High / low 52w 46.6 / 28.0 Weight 6.87 % Rel. Perf. 3 / 6 / 12 6 / 28 / 50 Abs. Perf. 3 / 6 / / 25 / 53 * Incl. minority interest Source(s) : Hydro, Bloomberg, Fondsfinans research Major shareholders as of Shareholders Shares Own.ship Nærings- Og Fiskeridepartementet 708.9m 34.7 % Folketrygdfondet 150.1m 7.4 % Clearstream Banking 64.2m 3.1 % Euroclear Bank ('Ba') 35.5m 1.7 % Norsk Hydro Asa 29.2m 1.4 % State Street Bank & Trust 28.5m 1.4 % State Street Bank & Trust 27.3m 1.3 % The Bank Of New York Mellon 24.8m 1.2 % State Street Bank & Trust 22.0m 1.1 % Dnb Nor Bank Asa 18.8m 0.9 % Total 10 largest 1,109.2m 54.4 % Other shareholders 930.8m 45.6 % Total shares 2,040.0m % Source(s) : Hydro, Bloomberg, Oslo Boers, Fondsfinans research 11

12 Definitions of ratings Buy Low risk: with a potential of min 5%. Medium risk: with a potential of min 10%. High risk: with a potential of min 20%. Neutral Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -20% to +20%. Sell Low risk: min 5%. Medium risk: min 10%. High risk: min 20%. Risk ratings are based on price volatility, fundamental criteria and perceived risk. Ratings are: Low (L), Medium (M) and High (H). Target: Our valuation as of today. Time frame of target: Target is what we value the share as of today. Recommendation distribution as of : Companies in each recommendation category that have been investment banking clients over the past 12 months: Recommendation No Percent Recommendation No Percent Buy % Buy 2 6 % Neutral % Neutral 1 7 % Sell 1 2 % Sell 0 0 % Total % Total 3 Our intention is to issue preview and update research on a quarterly basis. Our investment recommendation is elaborated in accordance with The Norwegian Securities Dealers Associations standards. This report has not been sent to the company for correction of any factual errors. Fondsfinans is organized with Chinese walls between the Corporate Department and the Research/Broking Department. In addition, Fondsfinans has internal instructions and guidelines for handling sensitive information. The analyst receives compensation that is impacted by overall firm profitability, including investment banking activities. Fondsfinans is under supervision of The Financial Supervisory Authority of Norway. The recommendation has not been changed from BUY. The previous recommendation was issued Ownership per in Norsk Hydro ASA: Analyst (including his/her closely related persons or companies): 0, corresponding to 0% of the company share capital Employees (including their respective closely related persons or companies): 25, corresponding to 0% of the company share capital Group Fondsfinans (including the holdings of its Chairman, his spouse and their closely related companies, Erik Must AS and its 100% controlled subsidiaries): 8.634, corresponding to 0% of the company share capital Fondsfinans may hold shares in Norsk Hydro ASA as a result of daily trading/market making. Information on such holdings is not given when of non-significant value. Fondsfinans do not act as market maker in Norsk Hydro ASA. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. 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