Morningstar | Raising Norsk Hydro FVE to NOK 37; Elevated Alumina, Energy Prices Offset Impact of Alunorte Outage
Norsk Hydro announced solid third-quarter results reflecting higher realized aluminum and alumina prices and strong energy segment profits. However, raw material cost inflation and a continued outage at the Alunorte alumina refinery weighed on results. Having slightly increased our near-term profit forecasts for the bauxite and alumina and energy segments, we are raising our fair value estimate to NOK 37 per share from NOK 36. Our no-moat rating is unchanged.On Oct. 3, Norsk Hydro executives announced the full curtailment of the Alunorte facility, which had been operating at 50% capacity since March 2018. However, just two days later, Hydro announced that it reached an agreement with Brazilian officials to resume production at 50% capacity. Given the short window involved, we think the effect of the announced full curtailment on third-quarter results was minimal. Although the company has yet to provide a timeline for a full restart, we expect the situation to be resolved by 2019.
Accordingly, we maintain our 2018 and 2019 alumina price forecast of $450 and $375 per metric ton, respectively. However, we view the supply shutdown as temporary, with our long-term price forecast remaining unchanged at $270 per metric ton. Given the strong third-quarter performance of the energy segment, we have increased our 2018 profit forecast to account for higher margins made possible by elevated prices. Third-quarter underlying operating income for the energy segment was NOK 652 million versus NOK 362 million a year earlier. We also expect alumina shipments to decline less than previously anticipated in 2018, considering the quick turnaround following the announcement of the full curtailment of Alunorte.
Despite these near-term impacts, we remain cautious about the long-term prospects for global aluminum demand growth. We expect a combination of persistent overcapacity and decelerating demand growth to weigh on prices.
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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