20150923-DBS_Group-RUSAL-00486.HK-Value_emerging_13页_317kb

DBS Group Research: Equity Summary - UC Rusal (Rusal)

Core Content

UC Rusal (Rusal) is the largest aluminium producer in the world by volume, with 3.6mt of aluminium produced in 2014, accounting for 7% of global output and 15% of global (excluding China) output. The company is a key player in the industrial metals sector, and its operations are significantly influenced by the Russian Ruble and global aluminium prices.

Key Assumptions

• Al sales volume (kt): 3,788.0 (FY Dec 2015)
• AI prices (US$/t): 1,882.9 (FY Dec 2015)
• Premiums (US$/t): 271.0 (FY Dec 2015)
• Aluminium cash cost (US$/t): 1,906.4 (FY Dec 2015)
• EBITDA (US$ mn): 1,284.0 (FY Dec 2015)

Main Points

Market Position and Performance

• Rusal is the world's largest aluminium producer by volume.
• The company has seen significant improvements in its financial performance, driven by cost reductions and the weakening of the Russian Ruble.
• The company's EBITDA and other financial metrics have shown substantial changes over the years, with notable declines in some periods and increases in others.

Financial Highlights

• 1H15 EBITDA: US$1,289mn, up 2.3x from previous periods.
• Net debt/EBITDA: Reduced from 5.8x in FY14 to 3.1x in 1H15.
• Free Cash Flow (FCF): Positive at US$521mn in 1H15, supported by strong operating cash flow.
• Dividend Income from NN: Estimated at US$842mn for FY15, with US$535mn received in 1H15.
• Net Profit: Improved from a loss in 2014 to positive figures in 2015 and onwards.

Valuation Metrics

• Price Target (HK$): HK$5.06, representing a 51% upside from the last traded price of HK$3.34.
• EV/EBITDA (FY15F): 3.4x, trading at a discount compared to global peers.
• P/Book Value (FY15F): 1.9x, indicating a favorable valuation.
• ROAE (%): 37.5% in FY14, showing strong returns on equity.

Catalysts

• Weakening Ruble: The depreciation of the Ruble against the USD has significantly reduced production costs, as 50% of costs are in Rubles and 100% of sales are in USD.
• Aluminium Supply Shock: The impact of China's semi exports on the global aluminium market has largely subsided, leading to a surplus in the market.
• Dividend Income from NN: The 27.8% stake in Norilsk Nickel (NN) provides a buffer for Rusal's share price and reduces financial costs.

Risks

• Stronger Ruble: A stronger Ruble against USD could negatively impact Rusal's profitability.
• Higher Aluminium Prices: If aluminium prices increase, it may lead to higher EBITDA.
• Weaker Aluminium Prices: A decline in prices could reduce EBITDA.

Sensitivity Analysis

• A 1 Ruble change against USD could swing full-year EBITDA by US$40mn.
• A US$1/t change in Al prices could swing EBITDA by US$3mn.

Key Information

• Major Shareholders: En+ Group (48.1%), Onexim Holdings (17.0%), SUAL Partners (15.8%), Amokengra Holdings (8.8%), Free Float (10.3%).
• Issued Capital (m shrs): 15,193.
• Market Cap (HK$m/US$m): 50,744 / 6,548.
• Net Debt/Equity (FY14): 4.0x, decreasing to 1.1x in FY17.
• EBITDA Margin (FY15F): 7.8%, indicating a reduction in profitability compared to previous years.

Investment Thesis

• Profile: Rusal is a major player in the global aluminium market, with significant cost reductions and a strong position due to the Ruble depreciation.
• Rationale: The company has a fast deleveraging pace, lower production costs, and a key benefit from the weaker Ruble. The investment in NN provides a buffer for Rusal's share price and reduces financial costs.
• Valuation: The price target of HK$5.06 is based on a 0.7x P/NPV and 5.1x FY15F EV/EBITDA, suggesting a favorable valuation compared to global peers.
• Risks: The company is sensitive to changes in the Ruble and aluminium prices, which could impact its financial performance.

Peer Comparison

Conclusion

Rusal is a major player in the global aluminium market, with significant cost reductions and a strong position due to the depreciation of the Russian Ruble. The company's financial performance has shown improvement, supported by a buffer from its investment in Norilsk Nickel. The price target of HK$5.06 is based on a favorable valuation compared to global peers, indicating a potential upside of 51%. However, the company is sensitive to changes in the Ruble and aluminium prices, which could impact its financial performance. The investment thesis is supported by strong deleveraging, cost reductions, and a strategic investment in NN, making Rusal an attractive investment opportunity.