20150727-高盛-Deleveraging_continues_despite_turbulent_Al_prices__FCF_intact__Buy_21页_615kb

Rusal Summary: Deleveraging Continues, FCF Intact, Buy Rating

Core Content

Rusal's share price has declined by approximately 12% over the past two months, driven by a 10% drop in aluminium prices, a 14% decline in Norilsk Nickel's share price, and a 16% correction in the Chinese equity market. Despite these challenges, the report maintains a Buy rating with a revised 12-month price target of HK$7.5, implying a 93% upside potential from the current price of HK$3.90. The key factors supporting this view are Rusal's low-cost operations, favorable foreign exchange (FX) trends, upside potential in aluminium prices, and dividends from Norilsk Nickel.

Main Points

• Share Price Performance:

  • Rusal's share price has dropped by 14.3% over the last 3 months, 27.6% over 6 months, and is up 1.8% over 12 months.
  • The stock has underperformed relative to the MSCI Russia index by 3.4% over 3 months and 30.1% over 6 months.

• Deleveraging Progress:

  • Net debt/EBITDA is expected to decrease from 6.3x in 2014 to 1.3x in 2018.
  • Strong free cash flow (FCF) generation is anticipated, with an average FCF yield of ~25% over 2015-20E.

• Valuation Discount:

  • Rusal trades at a ~50% discount to its global aluminium peers on a 12-month forward EV/EBITDA basis.
  • The current EV/EBITDA ratio is 3.0x vs. the peer average of 6.7x and its historical median of 6.5x.

• Price Target Update:

  • The 12-month price target is revised to HK$7.5 from HK$10.5, based on updated aluminium price estimates and FX outlook.

• Company-Specific Catalysts:

  • 2Q15 financial results (due August 27) are expected to alleviate concerns about FCF generation.
  • Production discipline and cost optimization are key to sustaining FCF and deleveraging.
  • An update on strategy and dividend policy is expected by the end of August, which may enhance investor confidence.

• Dividends from Norilsk Nickel:

  • Rusal's stake in Norilsk Nickel (27.8%) is a critical source of funding.
  • Dividends from Norilsk are estimated at ~US$0.8 bn over 2015-20E.
  • Norilsk has introduced a dividend adjustment mechanism, which could provide a more stable cash flow to Rusal.

• Aluminium Market Outlook:

  • The global aluminium market is currently weak, with ~40% of production loss-making at current all-in prices.
  • Prices are expected to rise by 15% and 25% in 2016 from current levels, supporting Rusal's FCF.
  • The report notes that China's aluminium production has increased significantly, with a 40% rise since January 2015.

• Nickel Price Outlook:

  • Nickel prices are expected to increase by ~20% over the next 3-6 months and ~25% over the next 12 months, supporting Norilsk's financials and dividends.

• China Equity Market:

  • The Chinese equity market has experienced a 16% correction from its peak in April, but the report expects stabilization.
  • The correction is viewed as a short-term event, with modest implications for the real economy.

• Debt Repayment and Dividend Policy:

  • Rusal's FCF is expected to cover US$3.6 bn in debt repayments over 2015-18.
  • The company could begin paying dividends in 2016 if net debt/EBITDA drops below 3.5x.
  • A new dividend policy is expected to be released by the end of August, enhancing the predictability of cash flows.

• Risks:

  • Downside risks include lower aluminium prices, ruble strength, cost inflation, lower cost optimization, regulatory risks, and changes to Norilsk's dividend policy.

Key Financial Metrics

Investment Highlights

• Buy Rating: The report reiterates a Buy rating with a revised price target of HK$7.5.
• FCF Generation: Rusal's FCF is expected to remain strong, supporting its deleveraging strategy and dividend payments.
• Dividend Stream: Dividends from Norilsk Nickel are a key component of Rusal's cash flow, expected to be ~US$0.8 bn over 2015-20E.
• Valuation Discount: Rusal is currently undervalued relative to its peers and historical averages, suggesting potential for a re-rating.

Conclusion

Rusal is positioned for deleveraging and FCF generation despite recent market turbulence. The report highlights the reversal of negative price drivers and company-specific catalysts that could lead to a recovery in share price. The Buy rating reflects confidence in Rusal's ability to improve its financial position and deliver returns to equity holders.