Rusal (OTC:RUALF), the world’s second largest aluminum producer, has so far gotten no coverage on SA. This article aims not only to fill this gap but also to convince readers that the stock is a very interesting long idea at the moment. My proprietary model shows an upside of about 70% upside for the company at an average LME aluminum price of $1,850 (2% below the market) in 2017-2018 and growing with inflation at 2% thereafter.
At current prices (plus physical delivery and VAP premiums of about $150/t), Rusal is making about $600 of EBITDA per ton of aluminum, which translates into an EV/EBITDA 2017E multiple of 4.7x (netting out Rusal’s stake in Norilsk Nickel), making Rusal one of the cheapest aluminum producers. At the guided long-term capex of $600m p.a., the company should be generating in excess of $600m in FCFE, making for a handsome 7-8% FCF yield and providing ample opportunities for debt reduction and/or dividend payment. On that count, Rusal stands out among key competitors: Alcoa, which at 4.3x EV/EBITDA 2017E is admittedly cheaper than Rusal, was OCF-negative last year, while Norsk Hydro (OTCQX:NHYKF), valued at a 20% premium to Rusal, generates about the same FCFE. I leave out the Chinese aluminum giants like Chalco, which has been barely eking out a positive FCF over the past couple of years and is valued at about 10x EBITDA.
I wanted to write about Rusal back in late December 2016, but, witnessing a 40% run-up in January 2017, decided it’s probably too late. Now, after a 27% correction, the stock is back almost to the December levels, while aluminum has added 15% since the start of the year. Therefore, in my view, the case looks even more convincing now.
In 2H16 the company had somewhat run ahead of itself, which partly explains the stock’s underperformance since the start of the year. However, I think the main reason why Rusal has been languishing since the start of 2017 is the strength of the Russian ruble, in which around 60% of the company’s costs are denominated. As for all Russian exporters, a strong ruble hurts the company’s margins. However, the Russian currency has already given back around 8% since the beginning of June on the back of a weakening oil and in anticipation of a seasonally weaker current account in 2Q-4Q. I believe the ruble’s weakening could be a major catalyst for the stock in the coming months. Another catalyst is the announcement of 2nd quarter results in August – with aluminum up more than 20% y-o-y and the ruble only 8% stronger, the company should demonstrate a strong financial performance.
Rusal is the world’s second largest aluminum producer after China’s Hongqiao, on track to produce 3.7mt of primary aluminum in 2017, or around 6% of global production. Over 40% of Rusal’s output is sold in Europe, while Russia/CIS, America, and Asia account for about 20% of sales each. The stock is most actively traded in Hong Kong (485 HK).
The company’s key competitive advantage is its low…