20150515-高盛-Strong_FCF_to_drive_deleveraging,_appealing_valuation__Buy_12页_447kb

Summary of Rusal Investment Analysis

Core Content

Goldman Sachs maintains a Buy rating on Rusal, with an updated 12-month target price of HK$10.3, implying 116% upside potential. The company's strong free cash flow (FCF) generation and deleveraging potential are the key drivers of the investment thesis.

Main Points

• Recent Performance: Rusal's share price underperformed the MSCI EM EMEA index by 18% since January 2015, primarily due to RUB appreciation, oil price recovery, and declining aluminium premiums.
• Financial Improvement: Rusal's EBITDA margins improved to 29% in 1Q15, the highest since 2008. This, along with production discipline, cost management, and dividends from Norilsk Nickel, is expected to support FCF generation.
• FCF Yield: The company is projected to have an average FCF yield of 23% over 2015–2020, including dividends from Norilsk Nickel, with its aluminium business expected to generate 13%.
• Deleveraging Outlook: Rusal's net debt/EBITDA ratio is projected to decrease from 6.3x in 2014 to 2.2x in 2016, with the potential to become net cash positive by 2019.
• Valuation: Rusal is currently trading at a c.35% discount to the firm's global aluminium coverage on a 2015–2016E EV/EBITDA basis (3.2x/2.6x), which is considered unwarranted given the company's strong earnings momentum and deleveraging prospects.
• Target Valuation: The valuation is based on a target EV/EBITDA multiple of 6.5x applied to 2016 estimates.
• Dividend Expectations: Rusal could potentially start paying dividends in 2015, but the firm expects the company to deleverage first, with the first cash distribution likely in 2017.

Key Financials

Valuation Metrics

Catalysts

• 2Q15 Financial Results: Expected to alleviate concerns over FCF generation, especially with the RUB strengthening.
• Production Discipline and Cost Cuts: These are expected to improve operational efficiency and support FCF generation.
• Norilsk Nickel Dividends: A key component of Rusal's cash flow, expected to be c.US$0.9 bn over 2015–2020.

Key Risks

• Lower Aluminium Prices: Could negatively impact revenue and earnings.
• Stronger RUB vs. USD: May increase costs, as ~60% of Rusal's costs are in RUB.
• Higher Energy Costs: Impact operating expenses through electricity and fuel costs.
• Lower Cost Optimization Efforts: Could reduce profitability.
• Changes in Norilsk Nickel's Dividend Policy: May affect Rusal's cash inflows and ability to deleverage.

Investment Profile

• Current Price (HK$): 4.76
• 12-Month Target Price (HK$): 10.30
• Upside Potential (%): 116
• Market Cap (HK$ mn): 72,318.8
• Enterprise Value ($ mn): 16,328.3

Summary Estimate Changes (GS vs. Consensus)

Conclusion

Goldman Sachs believes Rusal is undervalued and offers attractive upside potential due to its strong FCF generation, deleveraging potential, and appealing valuation. The firm is confident in the company's fundamental strengths and future cash flow prospects, despite short-term macroeconomic headwinds.