Morningstar | Norsk Hydro's 1Q Profit Plummets Due to Operational Headwinds; NOK 34 FVE Unchanged. See Updated Analyst Note from 06 Jun 2019
Norsk Hydro navigated a tumultuous first quarter that included a production embargo at the Alunorte alumina refinery and the fallout from a costly cyberattack. Indeed, the company's earnings release was heavily delayed by challenges related to the cyberattack. Additionally, lower aluminum prices depressed profitability, and global aluminum demand remained lukewarm. With no major changes to our valuation model, our NOK 34 fair value estimate is unchanged. We maintain our no-moat rating, as we don't expect Hydro to generate returns on invested capital above its cost of capital over our explicit forecast period.Underlying EBITDA of NOK 2.633 billion fell sharply from NOK 5.038 billion in the prior-year period. On NOK 37.853 billion of revenue in the first quarter, underlying EBITDA margins contracted to 7.0% from 12.6% year on year. Although we expect profitability to stabilize in the second quarter and improve thereafter, lower aluminum prices will drive declining revenue going forward. We forecast a 2% average annual revenue decline over our five-year explicit forecast period.
There is reason for cautious optimism, however, as the Brazilian government has lifted the Alunorte production embargo. It remains the world's largest alumina refinery and will continue to enjoy an enviable position on the global cost curve for alumina production. Additionally, normal operations have resumed, for the most part, since the cyberattack, which ended up having a NOK 300 million-350 million financial impact on the company. NOK 250 million-300 million of this total was incurred by the extruded solutions business. Regardless, the shares now trade only slightly below our fair value estimate. Given our very high uncertainty rating, a more significant discount to fair value would be needed for the stock to offer attractive risk-adjusted upside potential, in our view.
Norsk Hydro is an aluminium group based in Norway. Co. is engaged in the supply of aluminium and aluminium products. Co. supplies casthouse products, such as extrusion ingots, sheet ingots and foundry alloys. Co's customers are active in sectors such as the packaging, lithographic, building, automotive and transport sectors. In addition, Co. is engaged in the production of power in Norway. Its business is divided into six operating segments: Bauxite & Alumina, Primary Metal, Metal Markets, Rolled Products, and Energy and Other and Eliminations.
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