En+ - Perfect Match

We initiate coverage of En+ Group, a fully integrated green aluminum producer with the lowest costs globally. En+ consists of two business units, and we see upside in both. The first, En+ Energy, should benefit from a rebound in electricity output from its hydro power plants on recovering water levels. This, coupled with lower interest expenses, will boost leveraged free cash flow and, hence, dividends from the segment. The second, the metals business, represented by a 48.13% stake in RUSAL, should benefit from the recovery in aluminum prices. Based on a 2018E EV/EBITDA of 6.5 and leveraged FCF yield of 12.5%, we value RUSAL at $13.1 bln, which implies $6.3 bln for the stake controlled by En+. Adding in our $4.8 bln DCF-derived valuation of En+ Energy (using an 11.75% WACC and a 3.0% terminal growth rate), we come up with an equity value of $11.1 bln for En+. This translates into a target price of $19.39 per GDR, which implies upside of 47% and warrants a BUY recommendation. The stock is trading at a 2018E EV/EBITDA of 5.2 and P/E of 5.5, which we consider attractive entry points, given a healthy expected leveraged FCF yield of 15.7% (taking into account dividends from Norilsk Nickel) and dividend yield of 6.7% for 2018.