RUSAL: Smelted Lightning
We initiate coverage of RUSAL, the world’s leading aluminium producer, with a BUY rating and a HKD5.3/share target price. RUSAL is a geared exposure to the cyclical commodity, aluminium, for which we see upside potential driven by curtailments of both illegal and polluting facilities in China. We expect EPS to grow at a +19% CAGR in 2016-19 on stronger aluminium prices, a rising share of HVA products, and persistent RUB weakness. RUSAL has one of the world’s lowest production costs and (soon-to-be-full) integration into bauxite and alumina. Its net leverage of 1.4x EBITDA, adjusted for its 27.8% stake in Norilsk Nickel, does not look troublesome, and we expect RUSAL to increase its DPS to $0.024 (+50% YoY, 5.1% yield), thanks to cash inflows from the nickel producer. RUSAL trades at 5.2x 2017E adj. EV/EBITDA vs aluminium producers’ average of 7.8x, and its own 5Y average of 6.9x.
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