Capacity-driven earnings growth on the cards
Vahaj Ahmend, Head of Industrials Equity Research | Folasade Obilomo, Analyst
Aluminium Bahrain (Alba) is one of the largest aluminium smelters in the world. The company has a 1.0mtpa primary aluminium facility and produces a range of products, such as billets, liquid metal, rolling slabs, foundry alloys and standard ingots. Alba is currently adding its sixth potline (Line-6) with a capacity of 540 kilotonnes (kt) for an investment of cUS$3bn. The Line-6 Expansion Project (The Project) is on track to start production in January 2019 and will make Alba the largest single-site aluminium smelter in the world. The stock’s valuations do not appear challenging, at 2019f PE of 6.4x and EV/EBITDA of 7.3x (versus its peers’ 9.2x and 6.0x, respectively).
Alba’s new capacity could be absorbed given tight global supply. The clamp-down on illegal aluminium production in China and US sanctions on Rusal (the world’s second-largest aluminium company) have led to tighter supply in the global aluminium market. On the other hand, there has been lower production of alumina (the key raw material for smelters) in 2018, which pushed the alumina price to a five-year high of US$490/tonne (Australia FOB) in Q3. Around 40% of smelters could be losing cash at this price (according to the CRU Group) and the shortage of alumina might force smelter closures in 2019. These factors should help absorb Alba’s new capacity and we believe the company will remain profitable owing to its relatively efficient energy consumption (versus the global average).
We expect higher realised prices and more efficient indigenous power to expand margins in 2019f. Given the global supply tightness, we expect Alba’s realised prices to hover around US$2,350/tonne in 2018f-19f (c10% higher than 2017). The higher realised prices are also a result of the higher premiums achieved on US value-added sales in light of the US tariffs on Chinese aluminium. Alba is building a 1,792MW gas-fired power plant (known as PS-5) to energise Line-6. This new capacity will have a 54% efficiency rate (as compared with the existing capacity’s 40% efficiency) and will lower total energy consumption by c11% (in terms of kilowatt hours per tonne – kWh/tonne – of aluminium). These factors should improve Alba’s EBITDA margin to 20.2% in 2019f from 12.5% in 2018f.
Lower aluminium and higher alumina prices are the key risks to our thesis. Various supply factors have affected the aluminium market in 2018, but aluminium and alumina prices matter the most to smelters. Any improvements in primary aluminium supply from China and/or Russia could have a material impact on aluminium prices and, in turn, on Alba’s profits. On the other hand, any further cuts in global alumina production could be negative.
This report has been commissioned by Aluminium Bahrain (Alba) and independently prepared and issued by Exotix Capital LLP for publication. All information used in the publication of this report has been compiled from information provided to us by Alba and publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Exotix Capital at the time of publication. The sponsor has had no editorial input into the content of the note, and Exotix Capital’s fees are not contingent on the sponsor’s approval of the research.
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