Alrosa initiated at BUY, TP RUB 128 - Diamond in the rough yet to shine as the market rebounds

We initiate the coverage of Alrosa, the worlds largest rough diamond producer in terms of volumes, with a BUY recommendation and a target price of RUB 128, as our DCF valuation model suggests. We strongly advocate for an almost complete diamond market rebound by 2022e, given Alrosas and DeBeers firm grip on price formation. This price-over-volume strategy delivered the diamond industrys full recovery from the Great Recession (2008-09) in the space of two years. Consequently, we expect a ca. 21% expansion of the price tag throughout 2021e-2022e, which is to push the diamond price index back to the pre-crisis level by 2022e. Together with a simultaneous rebound of rough diamond sales volumes, the companys EBITDA is estimated to gain USD 672 mn in 2021e and USD 650 mn in 2022e, after a locally bad year 2020e. This translates into the firms enhanced ability to generate strong free cash flow of USD 0.4 bn in 2021e (7.0% yield), which is forecasted to skyrocket to USD 1.3 bn in 2022e (20.6% yield). Thanks to the transparent FCF-linked dividend policy, this should lead to the companys dividend yield leaping up to the sound 14.4% in 2022e, after balancing at the modest 4.1% and 3.5% levels in 2020e and 2021e respectively. Despite 2020e not delivering any declared dividend, the 2H 2019 dividend is still payable in the 3Q 2020e.