Q4 20 update – Weak dollar, global recovery support aluminium prices

  • We update our estimates for Aluminium Bahrain (Alba; ALBH BI Equity)
  • Increased aluminium prices boost earnings projections; low alumina prices pose upside risks
  • We increase our valuation estimate by 6% to BHD0.63/share (previously BHD0.60), implying upside of 22%

We update our estimates for Aluminium Bahrain (Alba) post a Q4 20 net profit of BHD32mn. This was an impressive bounce back from a net loss of BHD11.6mn in the previous quarter and also beat our net profit estimate of BHD29.9mn – see preview note. It also marks the highest Q4 profits in the company's past five decades. The stock trades at 8.6x 2020f EV/EBITDA (versus peers at 7.7x) and offers a 2021f and 2022f free cash flow (FCF) yield of 20% each. We are optimistic of sustained high aluminium prices in the near term, particularly over H1 21. Alba's share price has increased c1% month-to-date, compared to 7% increase in LME aluminium price, while raw material prices (mainly alumina) remain unchanged. We increase our valuation estimate by 6% to BHD0.63/share (previously BHD0.60), implying upside of 22%.

Increased aluminium prices boost earnings projections, while low alumina prices pose upside risks to our earnings estimates. Aluminium prices continues to ride on economic recovery from Covid in 2020 when prices touched a 5-year low of US$1,459/tonne in Q2 20. The 30% increase in aluminium prices since H1 20 has been attributed to a weak dollar, strong recovery in China and US markets, and the increase in freight prices. On the other hand, alumina currently trades around US$301/tonne, which is 14.4% of the current LME aluminium price. While we have seen steady increases in alumina prices as economic activities boost demand (in line with our expectations), the current ratio to aluminium prices is 280bps below its 5-year midpoint of 17.2%. Over Q1 21, we assume the ytd average ratio of 14.9% is retained over the rest of the quarter, before increasing to c20% over Q2 21-Q4 21 as the global economy recovers. Having said that, there could be upside risk to our earnings estimates if the current ratio of alumina and aluminium prices persists. We now estimate 2021f realised prices of US$2,178/tonne (7% higher vs US$2,025 previously) on the back of higher LME aluminium prices of US$2,017/tonne (previously US$1,851) using Bloomberg forecasts. Further out, we expect realised prices will remain stable at an average of US$2,183 over 2022f-26f.

Alba plans to secure alumina supply by venturing upstream. As we mentioned in our last update (see here), Alba's board approved the plan to enter into a joint-venture (JV) to secure 1.0mt of alumina to strengthen its supply chain. On the call, management clarified that the need to explore opportunities in the upstream space is to secure supply of the primary resource for its now expanded plant capacity of 1.54mt, having added 540kt in 2020. Securing the offtake agreements would also help hedge prices of alumina and prevent a re-occurrence of the black swan event of 2018. In addition, 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.

Meanwhile, in December 2020, ALBA signed a memorandum of understanding with China's Hangzhou Jinjiang Group (HJJ) for supply of raw material alumina to the Gulf state aluminum producer. The MoU will remain in effect for a period of three years and can be extended based upon mutual agreement among both parties. HJJ is a leading Alumina producer with production capacity of 10 million mt.

Aluminium Bahrain (year-end, December)

ALBH BI: Peer comparison

Valuation

Our December 2021 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 1.5% (previously 1.6%).

ALBH BI: WACC estimate

ALBH BI: Equity value contribution (BHDmn)

Risks to valuation

We value Alba shares at BHD0.63/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 and 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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