Alro: loss-making without State aid (downgraded to HOLD)

We have revised our estimates to account for the reduction in electrolytic aluminium production and the new market conditions in terms of aluminium and power prices. Although aluminium prices are now significantly above the levels of previous years, the 3-4x increase in power prices has rendered Alro’s production of electrolytic aluminium uneconomic. We estimate that the cost per ton to produce stands c.65% above LME aluminium prices currently. In this environment, the 60% reduction in production for electrolytic aluminium, coupled with a stronger reliance on internal and external scrap and ingots purchased from third parties, makes sense to us, given that the latter are accounted for/acquired at a discount to LME aluminium price. We see an easing in power prices from 2024E-onwards which, we expect, could allow Alro to restore production levels for electrolytic aluminium to closer to past years. Aided by compensation for indirect emissions for 2021-22E, we see the 2022E net profit reaching RON 305m, then falling to RON 193m in 2023E, assuming lower aluminium prices and compensation booked for just one year. We estimate lower net profit again yoy in 2024E, despite higher production of electrolytic aluminium, with profitability finally improving from 2025E, on the back of falling power prices. We continue to value Alro using a combination of our DCF analysis, and peer group multiples, which yields a 12M PT of RON 1.62 (vs. RON 4.40, previously), offering just 14% upside vs. the current price. We have downgraded the stock from Buy to HOLD.