Shares in Hong Kong-listed UC Rusal have rallied more than 50% since the beginning of July on the back of a rebound in aluminum prices. Citi reckons the surge in aluminum prices can push the stock even higher.
The broker boosted its target price on the world's second largest aluminum producer's stock from HKD5.50 a share to HKD6.50 a share, implying 12% upside. The broker says increased earnings from higher aluminum prices, balance sheet de-gearing and an increase in the value of its 27.8% stake in Norilsk Nickel, the world's largest producer of nickel and palladium, should continue to fuel the upward momentum of the stock.
With an 18% free-cash flow yield, the stock also has an attractive valuation. Here's Citi analyst Ephrem Ravi, who has a buy rating on the stock, in his own words:
Stronger cash from core aluminium business and Norilsk dividends come together for a strong FCF. The stock is trading at 18% FCF yield on our 2018 forecasts, which could go up to 20% on spot commodity prices. This could mean an accelerated de-gearing by up to $900 million a year. The stock is trading at 5.4x 2018E EV/EBITDA (ex-Norilsk), which makes the valuation case attractive even after a c65% rally in the share price in 2017 YTD.
Rusal last week unveiled a solid set of results for the second quarter in a row. Revenue for the six months ended June 30 rose 22% year-on-year to USD4,764 million, while earnings before interest, tax, depreciation and amortization (EBITDA) rose 50% year-on-year to UD985 million.
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