Aluminium Bahrain: Q3 2020 update – near-term positive as aluminium prices rise

  • We update our estimates for Aluminium Bahrain (Alba; ALBH BI Equity)
  • Unusually low alumina prices pose upside risks to our earnings estimates
  • We increase our valuation estimate by 3% to BHD0.60/share (previously BHD0.58), implying upside of 46%

We update our estimates for Aluminium Bahrain (Alba) post a Q3 20 net loss of BHD11.6mn, weaker than our net profit estimate of BHD4.6mn – see preview note. The stock trades at 8.3x 2020f EV/EBITDA (versus peers at 7.7x), and offers a 2020f and 2021f free cash flow (FCF) yield of 12% and 19%, respectively. The higher aluminium (and lower alumina) prices in the near-term could be positive for Q4 20 and Q1 21 earnings. Alba's share price has increased c6% month-to-date, in line with the 7% increase in LME aluminium price, while raw material prices (mainly alumina) remain unchanged. We increase our valuation estimate by 3% to BHD0.60/share (previously BHD0.58), implying upside of 46%.

Unusually low alumina prices pose upside risks to our earnings estimates. Alumina currently trades around US$275/tonne, which is 14.2% of the current LME aluminium price of US$1,936/tonne – the lowest in the last 10 years. We assume this ratio reverts to c17.5% (its historical midpoint) in Q1 21 as global economy recovers; there could be upside risk to our earnings estimates if the current ratio of alumina and aluminium prices persist. We now estimate 2020f realised prices of US$1,827/tonne (5% higher vs US$1,748 previously). For 2021f-23f, we now assume 3-5% higher realised prices, mainly due to 35% higher physical premiums of US$144/tonne (versus US$108/tonne previously).

Plan to go upstream. Alba's board has approved the plan to enter into a joint-venture (JV) to secure 1.0mt of alumina to strengthen its supply chain. The management indicated that a JV with alumina refineries within the Middle East could significantly reduce freight costs. However, most of these refineries and/or integrated aluminium players are operating at near-optimum capacity. We have not yet incorporated this in our estimates.

Aluminium Bahrain (year-end, December)

ALBH BI: Peer comparison

Valuation

Our December 2020 fair value for Alba is based on a discounted cash flow (DCF) valuation and net cash. The key parameters in our DCF are:

  1. A risk-free rate of 2.3%;

  2. An equity risk premium of 5.0%; and

  3. An after-tax cost of debt of 1.6% (previously 1.5%).

ALBH BI: WACC estimate

ALBH BI: Equity value contribution (BHDmn)

Risks to valuation

We value Alba shares at BHD0.60/share. The key factors impacting our valuation are:

  1. Long-term LME aluminium price assumption of US$2,150/tonne; and

  2. Long-term all-in delivered alumina price assumption of US$400/tonne (US$380/tonne Australia FOB plus US$20/tonne for insurance and freight).

Lower aluminium and higher alumina prices are the key risks to our thesis. Any improvements in primary aluminium supply could have a material impact on aluminium prices and, in turn, Alba’s profits. On the other hand, any cuts in global alumina production could be negative.

Company profile

Aluminium Bahrain (Alba) is the largest single-site aluminium smelter in the world. The company has a 1.5mtpa primary aluminium facility and produces a range of products such as billets, liquid metal, rolling slabs and standard ingots. Alba recently added its sixth potline (Line-6) with a capacity of 540 kilotonnes (kt) for an investment of cUS$3.5bn.

Alba was established in the Kingdom of Bahrain in 1968 and commenced operations in 1971 as a 120kt per annum smelter. In 2019, Alba achieved record-high production of 1,365kt of the highest-grade aluminium. As of 31 December 2019, close to 23% of its total output was supplied to Bahrain’s downstream aluminium industry, while the rest is exported to Asia & MENA (36%), Europe (25%) and the Americas (16%). Alba is a major contributor to Bahrain’s socio-economic development and employs 3,181 people (as at 31 December 2019) of which over 80% are Bahraini nationals.

Mumtalakat Holding Company (the sovereign wealth fund of Bahrain) holds c69% of Alba. The other key shareholder of the company is Saudi Basic Industries Corporation (SABIC, c21%), while the remaining 10% is free float.

ALBH BI: Ownership structure

ALBH BI: Financial summary (year-end, December)

This report has been commissioned by Aluminium Bahrain (Alba) and independently prepared and issued by Tellimer 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 Tellimer at the time of publication. The sponsor has had no editorial input into the content of the note, and Tellimer’s fees are not contingent on the sponsor’s approval of the research.


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