Alcoa. TRINITY SMF Investment Thesis. Sector Manager: Tim Blythman Senior Analyst: Ellie Hogan Analysts: Rebeca Fryer Sibeal Wheatly & Adam Claffey

Transcription

1 Alcoa Pitch

2 Alcoa TRINITY SMF Investment Thesis Sector Manager: Tim Blythman Senior Analyst: Ellie Hogan Analysts: Rebeca Fryer Sibeal Wheatly & Adam Claffey

3 Summary of Investment Thesis The split in the company has led to the market mispricing the company Priced as two separate companies in a 50/50 split: Not an accurate representation of the split in the company s revenue drivers Company appears to have been planning for this based on recent acquisitions and plant improvements Reasons for price decline: Split: Upstream section is being overweighted Poor results: First to report earnings

4 Company Overview

5 Introduction: Company Snapshot : Recommendation BUY Current Price $7.37 Price Target $14.51 Upside 88.7% Timeline 3 /4 Years Market Cap. $10.08B 52wk range $6.14-$16.07 P/E Div. Yield 1.22% FCF Yield 4.61 Analyst Consensus Buy

6 Business Overview Alcoa Inc. produces and manages primary aluminium, fabricated aluminium, and alumina worldwide The company operates through four divisions: Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. The Alumina segment is involved in mining bauxite, which is then refined into alumina. The Primary Metals segment produces primary aluminium. The Global Rolled Products segment produces and sells aluminium plates, sheets, and foils, as well as rigid container sheets for food and beverage packaging markets. The Engineered Products and Solutions segment offers titanium, super alloy investment, and aluminium castings; fasteners; aluminium wheels; integrated aluminium structural systems; architectural extrusions; and forgings and hard alloy extrusions The company s products are primarily used in the transportation, including aerospace, automotive, truck, trailer, rail, and shipping; packaging; building and construction; oil and gas; defence; consumer electronics; brazing; power generation; and industrial applications. A very promising recent discovery in aluminium production is looking to generate a larger revenue for Alcoa. This process, called Micromill, is used primarily in the auto industry and is 40% more formable than previous automobile aluminium. Ford Motor Company realized the potential of this new technology and signed a multi-billion dollar deal with Alcoa to use in the 2016 Ford F-150 truck which will allow it to have a higher payload and towing ability due to it s reduced weight. It is also rumoured that Alcoa will be signing a deal with Bentley to utilize Micromill in the upcoming Bentyaga SUV.

7 Revenue Breakdown

8 The Separation Value Added Sector: Global Rolled Products, Engineered Products and Solutions and Transportation and Construction Solutions Revenue of $13.5 billion, Adjusted EBITDA of $2 billion. Up 5% on 2014 Approx $9 billion in new aerospace contracts in 2015, and still announcing new deals New plant expansions and company acquisitions in recent years leave it in a great position Upstream: Global Primary Products: Bauxite, Alumina, alumnimum, cast products and energy Revenue $11.2 billion, adjusted EBITDA of $2 billion On course to be in 38th percentile on global aluminium cost curve and 21st percentile of alumina global cost curve Actively and aggressively tackling issues to deal with new low commodity prices

9 Management Klaus Klienfeild has been the CEO of Alcoa since 2007, and currently sits at the board of directors, with his term expiring in Awarded the CEO of the year within metals industry. Klienfield owns 0.02% of the company compared to an industry median of 0.17%. Over $3.5 million shares. William F Oplinger is the CFO, appointed in 2013, but has been with Alcoa for many years. Under his leadership they announced the separation into two entities in the 2nd half of Owns $285,000 in Alcoa common stock. Alcoa Incentive Compensation Plan introduced in 2004 to give financial awards to individuals who achieve key performance goals. E.g. Shareholder return, cost control, safety. Attempt to balance performance reward with equity rewards for management. Directors are required to own at least $750,000 worth of Alcoa common stock. Alcoa prohibit the use of financial instruments that are designed to offset any decrease in the market value of Alcoa securities as part of Insider Trading Policy.

10 Industry & Competitive Positioning Key Competitors (Source: Yahoo Finance) -Rio Tinto Alcan Inc. -Key share in upstream business, owns extensive transport network, products very similar (Aluminium, alumina and bauxite). It s 2007 acquisition of Alcan for $39bn is widely believed to have been a big mistake and has hampered the company s ability to make subsequent purchases. The company lacks the major downstream, value added products which Alcoa enjoys. -RUSAL - Principal business similar, targeting India as a future growth market, again focus on upstream, lacks a strong downstream, interests include focusing on developing more value added products and expanding downstream investment. -Aluminium Corporation of China Limited (Chinalco) - the second-largest alumina producer and third-largest primary aluminium producer globally. In 2008, Chinalco teamed up with Alcoa to buy a US$14 billion stake in Anglo- Australian mining giant Rio Tinto. Currently Rio Tinto s biggest shareholder with a 9.9 percent stake. Again main focus on upstream currently but due to persisting low prices have announced recently plans to shut down its biggest aluminum smelter, which accounts for about an eighth of its total capacity. Key investment objectives include diversifying their resource portfolio and expanding its operations in Peru. Sector Trends -New 52 Week lows in prices of key base metals -Attempts to curtail inefficient production -Interest in reducing costs, reducing debt and creating leaner balance sheets -Spin-offs as a means to package and divest assets (South 32) -Increasing mergers and joint ventures and perhaps increases in hostile takeover bids by better capitalised entities ( two-thirds of alumina bauxite producers are losing money - industry is ripe for consolidation) -Desire to develop more value added products due to high revenue associated - especially aeronautical, aerospace and high tech metal products Industry News -Du Pont - Dow Chemical merger - result of poor performance in both 2014 and Anglo America have announced survival plans under pressure from persisting low prices - two thirds of the mining giant s assets are to be sold or closed -Rio Tinto Alcan are facing a host of legal disputes globally. Also announced plans to cut their dividend. Rumors have been circulating regarding a potential this cut will be followed by a bid for Alcoa s alumina operation following news of its planned upstream and downstream asset split. - Rio Tinto remains committed to it s Amrun bauxite mine despite its profits falling, however the corporation is considering a joint venture partner to help fund the project, most likely Chinalco.

11 Financial Overview

12 Financials. Summary Total Revenue 22.53B Gross Margin 18.19% (mrq) EBITDA 3.25B EBITDA Margin 11.61% ROE 3.92% (ttm) FCF Margin 3.9% (ttm) Total Debt 9.1B (mrq) FCF Yield 1.72% (ttm) Total Debt/Equity.73 (mrq) Div. Yield 1.22% (ttm)

13 Income Statement 2014A 2015E Revenue Revenue Growth 3.65% -27.6% Operating Income EBITDA Net Income EPS EPS Growth 112.1% 23.8% DPS DPS Growth 5% -25%

14 Balance Sheet & Cash Flow Statement: 2014A 2015E Cash and Equivalents 1,877 1,919 Total Assets 37,399 36,737 Total Debt ,044 Total Liabilities 22,605 22,408 Shareholders Equity Cash Flow Operations 1,674 1,582 Cash Flow Ops Growth 6% -5.4% Cash Flow Investing Cash Flow Financing Capital Expenditure -1,219-1,180 Free Cash Flow Free Cash Flow Growth 18% -13%

15 Debt Analysis The company has $9.1b of long term debt It has a debt to equity ratio of.73. Yields on Alcoa bonds have been rising. Around 4% for a 1 year bonds and 9% for 10 year bonds. Majority of Alcoa bonds mature in next 10 years. "Alcoa current intent is that the debt of Alcoa would be retained by the value-add company for which Alcoa is targeting an investment grade rating." Alcoa has a speculative grade credit rating off the 3 major credit rating agencies. Debt has risen mainly due to investment in the value-add business and acquisitions.

16 Valuation

17 Valuation Name P/E Fwd P/E EPS Gr EPS Gr Div Yield Div. Cover ROE EBITDA Mkt. Cap YTD. Perf AA % 0.84% 2, B RIO N/A N/A % 3.63% 15, B Rusal N/A N/A N/A N/A -8.55% B Chinalco N/A N/A N/A N/A 3.46% -16, B

18 Implied Multiples Valuation Metric Median Industry Value Implied Price P/E FWD P/E P/B Average Price $14.72 (+91.76%) EV/EBITDA Model EBITDA: 2,989M Low Base High EV/EBITDA EV 17,793 19,770 21,747 + Cash 1,919 - Debt 9,100 Value of Equity 9,072 10,080 11,088 No. Shares 1,310 Per Share Value ($) Potential Upside 76.6% 96% 116%

19 Risk Splitting up company will make commodity part worse off so overall shareholders might not be better if with 2 separate entities Otherwise: aluminium is a growing market so value added part should do well & alcoa doesn't seem too exposes to China Commodities are weak and volatile at the moment and show no sign of recovering soon Beta: 0.7

20 Risk

21 Portfolio Positioning & Current Holdings Provides a new exposure to new markets through the value added section Exposure to growth industries such as aerospace, automobile etc Diversifies our mining holdings into aluminium

22 Summary of Investment Thesis Being priced as two companies Access to the value added part of the business for a very favourable price Aluminium will bounce back in the next couple of years Shifting to more low cost production putting it in a strong position going forward Low debt levels in the company allow for future flexibility in company strategy

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