En+ - Rusal Upgrade Lifts En+ Valuation; No Upside in the Power Segment

After incorporating Rusal's 2020 figures into our model and updating our projections for the En+ power segment, we have raised our target price for En+ to $14.40 per GDR and introduced a ruble TP of R1,066. We reiterate our BUY rating on the stock, but we note that the upside now comes from Rusal's valuation, as the current implied valuation of the power segment is about in line with our fair value estimate based on an equal weighting of DCF and DDM. In this respect, it might make more sense to play Rusal's upside directly via Rusal shares as a more straightforward bet.> The upside is all with Rusal... Our metals team recently adopted a bullish stance on Rusal (see the report), causing us to dramatically increase our estimate for the value of the stake held by En+ in Rusal (up 63%, from $4.5 bln to $7.3 bln). Meanwhile, we have lowered our valuation of the power segment by 23%, from $2.5 bln to $1.9 bln, mainly due to higher capex assumptions, a weaker ruble projection and a later restart to dividend payments (2022 payment from 2021 results), which has affected the DDM element of our valuation.> ... which also provides protection in the event of consolidation. En+ has indicated that a consolidation of the group is being considered. We see Rusal as the main source of fundamental upside in the current market and also believe its shareholders get additional comfort from the HK listing (a mandatory tender offer to minorities). We therefore believe it makes sense to play the En+ story via Rusal for the time being.> ESG leadership could provide support. We regard En+ as a Russian leader in terms of its ESG commitment: it is the first and (up to now) only Russian company to announce plans to reach net zero emissions by 2050 (including a 35% cut to Scope 1 and Scope 2 emissions by 2035). En+ is also one of the most vocal Russian players advocating ESG targets and actively promoting net zero and low-carbon aluminum initiatives.> Rusal's 2020 figures incorporated; 2H20 preview. We have updated our model to reflect robust water flows and actual electricity prices for the power segment and now expect segment revenues of $1.34 bln, EBITDA of $451 mln and LFCF of $31 mln in 2H20.> BUY reiterated, target price raised 31%. We retain our 50-50% DCF/DDM valuation for the En+ energy segment and use our metals team's target equity value for the stake in Rusal (as set out in the recent report). We lower our valuation for En+, but the significant increase to Rusal's fair value nevertheless boosts our target price for En+ by 31% to $14.40 and R1,066 per share.