Alumina Ltd Set To Re-Rate In 2014

This story features ALUMINA LIMITED, and other companies. For more info SHARE ANALYSIS: AWC

-Return to dividend payments likely
-Better cash position as debt reduces
-Supply/demand fundamentals positive
 

By Eva Brocklehurst

Is Alumina Ltd ((AWC)) about to shake investor apathy?

China's aluminium production industry is becoming more rational and CIMB considers this will benefit the pricing of alumina. CIMB's analysis suggests there's now much less chance that alumina prices will ease over the medium term. The broker forecasts earnings for AWAC – the joint venture between AWC and Alcoa – will expand to US$80/t in 2015 from US$45/t in 2013, driven by a weaker Australian dollar, slightly lower costs and about 10% higher realised alumina prices. This should allow for a substantial dividend from AWC and the broker suggests a yield of 6-7%. Should the historical correlation continue between AWC's share price and the distributions the company obtains from AWAC, then CIMB is flagging a substantial re-rating of the company.

The company has historically paid a relatively high dividend yield compared to sector peers but did not declare a dividend in 2013 because of a challenged operating environment. CIMB thinks the dividend yield over 2014 and 2015 will be more in line with the prior period averages, as improved profitability can be demonstrated. The company's policy has been to distribute cash to shareholders after servicing debt and corporate costs. CIMB expects a dividend of US4c per share in 2014 and this equates to a yield around 3.4%. The broker retains an Add rating.

CIMB observes Chinese aluminium production costs have declined by an average of 8% over the past two years, largely because of the idling or closure of expensive capacity. Production growth is expected to slow this year to under 10% in China, while the rest of the world is either flat or negative. Yet the robust global demand outlook suggests growth around 6-7% and CIMB thinks the disconnect between supply and demand will tighten the market sufficiently to put upward pressure on prices. At current prices the analysts do not expect producers are receiving much of a premium over the all-in cash cost of aluminium production, hence it is not surprising that capacity is being reduced.

Credit Suisse likes the stock too, on the potential for what the broker sees as a 9% dividend yield in 2015. The share price is expected to rise and the yield moderate to a lower level of around 6%. This broker also envisages AWAC revenue increasing as legacy aluminium price-linked contacts are rolled off and cash increases with less capex requirements. AWC is also expected to end capex injections into AWAC. Credit Suisse notes that AWC was forced to take on debt as growth capex needs blew out for the Brazilian expansion. This cash outflow will end in 2014 and, along with the move to spot pricing and the potential return to dividends, provides a sharply different outlook for the stock.

There are other bullish factors yet to be taken into consideration, in the broker's opinion, such as the closure of Rio Tinto's ((RIO)) Gove alumina refinery, to be completed mid year, and the Indonesian ban on bauxite exports, which should lift the spot price of alumina and force China's importing refineries to pay higher prices for bauxite as stockpiles reduce in 2015. Rio Tinto intends to export Gove bauxite into the seaborne market.

Credit Suisse does not think aluminium prices will follow alumina higher, as while supply restraint has emerged outside China, the stockpiles are large and will not reduce that quickly. Nevertheless, the broker points out that the aluminum is of less importance to AWAC now, as the closure of Point Henry removes a loss-making operation and legacy aluminium-linked contracts diminish. By 2015 Credit Suisse expects substantial cash will be available for distribution to the JV partners.

Another boon for AWC is any continued weakening of the Australian dollar as the vast majority of income is earned offshore. There are three Buy ratings on the FNArena database, three Hold and two Sell. The consensus target is $1.36, signalling 12.9% upside to the last share price. Targets range from 90c to $1.60.

See also, Alumina Ltd: The Next Yield Stock? on January 14.
 

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