vk.com/id446425943

Rusal – BUY

Figure 88: Rusal, $mn (unless otherwise noted)

Rusal		0486.HK
Market capitalisation, $mn:		6,351
Enterprise value, $mn:		13,999
Dec-YE	2016	2017	2018E	2019E	2020E
Income statement
Revenue	7,983	9,969	10,136	9,588	10,694
Underlying EBITDA	1,489	2,120	2,240	1,671	2,209
Underlying EBIT	1,024	1,607	1,738	1,154	1,634
EBIT	1,068	1,523	1,572	1,154	1,634
Net interest	-860	-855	-534	-626	-576
Equity accounted income	848	620	1,049	918	979
Taxation	-175	-66	-170	-90	-180
Other	298	0	0	0	0
Net profit for the year	1,179	1,222	1,917	1,357	1,857
Underlying earnings	1,179	1,222	1,917	1,357	1,857
Underlying EPS, USc	7.76	8.04	12.62	8.93	12.22
Thomson Reuters consensus EPS, USc			12.49	12.91	13.69
DPS declared, USc	1.65	1.97	2.61	2.15	2.63
Income statement ratios		0.036471
EBITDA margin	19%	21%	22%	17%	21%
EBIT margin	13%	15%	16%	12%	15%
EPS growth	111%	4%	57%	-29%	37%
Dividend payout ratio	21%	24%	21%	24%	22%
Input assumptions
Aluminium, $/t	1,604	1,968	2,110	1,953	2,166
Alumina, $/t	283	376	485	391	412
RUB/$	67	58	63	67	68
Estimated aluminium breakeven price, $/t	1,341	1,588	1,658	1,629	1,719
Production volumes, kt
Aluminium
Russia Aluminium	3,562	3,584	3,622	3,632	3,670
Other	161	144	148	147	147
Total	3,723	3,728	3,770	3,779	3,818
Alumina
Ireland	1,967	1,938	1,925	1,970	1,970
Jamaica	608	582	601	615	615
Ukraine	1,510	1,675	1,693	1,733	1,733
Russia	2,730	2,821	2,844	2,911	2,911
Australia (JV)	760	755	754	772	772
Total	7,528	7,772	7,816	8,000	8,000
Bauxite
Jamaica	2,123	1,954	2,235	2,462	2,462
Russia	5,432	5,524	6,274	6,909	6,909
Guinea	3,539	3,123	3,751	4,700	6,000
Guyana	1,094	1,044	1,538	1,693	1,693
Total	12,187	11,646	13,794	15,764	17,064
Nepheline	4,432	4,333	4,629	4,720	4,720
Aluminium foil and packaging	85	101	101	101	101
Sales volumes
Aluminium, kt	3,818	3,955	3,650	3,779	3,818
Value added products, % of total	44%	47%	46%	46%	50%

Contribution to enterprise value of $19bn

Norilsk Nickel

44%

Aluminium

56%

Renaissance Capital

6 February 2019

Metals & Mining

	Target Price, HKD:					6.0
	Share price, HKD:					3.3
	Potential 12-month return:					88.2%
Dec-YE	2016	2017		2018E	2019E	2020E
Balance sheet
Net operating assets	11,377	12,139		12,303	12,287	12,548
Financial instruments	32	-50		-36	-36	-36
Equity	2,988	4,441		5,285	6,315	7,772
Minority interest	0	0		0	0	0
Net debt	8,421	7,648		6,982	5,937	4,740
Balance sheet ratios
Gearing (net debt/(net debt+equity))	73.8%	63.3%		56.9%	48.5%	37.9%
Net debt/(EBITDA+dividends from associat	4.7x	2.4x		2.2x	2.3x	1.5x
RoCE	8.8%	12.6%		13.3%	8.8%	12.3%
RoIC (after tax)	5.7%	10.3%		10.8%	7.5%	10.3%
RoE	56.3%	32.9%		39.4%	23.4%	26.4%
Cash flow statement
Operating cash flow	1,331	2,869		2,365	2,754	2,786
Capex	-575	-842		-770	-850	-700
Other FCF	508	-311		-65	0	0
FCF	1,264	1,717		1,530	1,904	2,086
Equity shareholders' cash	201	1,072		1,062	1,372	1,597
Dividends and share buy backs	-250	-299		-396	-327	-400
Surplus (deficit) cash	-49	773		666	1,045	1,197
Cash flow ratios
Working capital days	77	64		81	74	72
Cash conversion	0.2x	0.9x		0.6x	1.0x	0.9x
FCF yield	9.3%	10.4%		12.0%	15.5%	18.8%
Equity shareholders' yield	3.8%	12.2%		18.4%	21.6%	25.1%
Capex/(EBITDA+Norilsk dividends)	32.3%	26.0%		24.3%	32.5%	21.9%
Valuation					$mn
SoTP DCF valuation and calculation of target price						HKD/sh
Aluminium					10,901	5.6
Norilsk Nickel					8,493	4.4
Total enterprise value					19,394	10.0
Net debt as at 31 December 2017					-7,648	-3.9
Cash used in share buy-backs					0	0.0
Other investments					-50	-0.0
Minority interest					0	0.0
Equity value as at 4/2/2019					11,696	6.0
TP						6.0
Share price on 1/2/2019						3.3
Expected share price return						82.9%
Plus: expected dividend yield						5.3%
Total implied one-year return						88.2%
Share price range, HKD:
12-month high on 5/2/2018	6.0	12-month low on 17/4/2018				1.3
Price move since high	-45.5% Price move since low					150.4%
Calculation of discount rate
WACC	12.5%	Cost of debt				6.0%
Risk-free rate	4.0%	Tax rate				15%
Equity risk premium	8.0% After-tax cost of debt					5.1%
Beta	1.30	Debt weighting				20%
Cost of equity	14.4%	Terminal growth rate				2.0%
Valuation ratios
Dec-YE	2016	2017		2018E	2019E	2020E
P/E multiple	4.4x	7.2x		3.0x	4.7x	3.4x
Dividend yield	4.8%	3.4%		6.9%	5.1%	6.3%
EV/(EBITDA+Equity income)	5.8x	6.0x		3.9x	4.7x	3.5x
P/B	1.8x	2.0x		1.1x	1.0x	0.8x
NAV per share, USc	19.7	29.2		34.8	41.6	51.2
NAV per share, HKD	1.5	2.3		2.7	3.3	4.0

Source: Bloomberg, Thomson Reuters, Company data, Renaissance Capital estimates

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vk.com/id446425943

South32 – HOLD

Renaissance Capital

6 February 2019

Metals & Mining

Figure 89: South32, $mn (unless otherwise noted)
South32 (Pro forma historic financials)				S32J.J						TP, ZAR:					37.0
Market capitalisation, $mn:				12,674						Share price, ZAR:					33.9
Enterprise value, $mn:				10,359						Potential 12-month return:					15.7%
Jun-YE			2017	2018	2019E	2020E	2021E		Jun-YE	2017	2018		2019E	2020E	2021E
Income statement									Balance sheet
Revenue			6,950	7,549	7,342	7,641	7,853		Net operating assets	8,027	7,977		9,031	8,916	8,934
Underlying EBITDA			2,411	2,516	2,348	2,173	2,167		Rehab provision net of investments	568	691		705	719	734
Underlying EBIT			1,648	1,774	1,588	1,384	1,385		Equity	10,236	10,710		10,655	10,845	11,031
Net interest			-171	-100	-96	-93	-80		Minority interest	-1	-1		-1	-1	-1
Taxation			-393	-287	-366	-306	-316		Net debt (cash)	-1,640	-2,041		-919	-1,209	-1,362
Minority interest in profit			0	0	0	0	0
Attributable profit			1,231	1,332	1,125	985	989		Balance sheet ratios
Underlying earnings			1,146	1,327	1,125	985	989		Gearing (net debt/(net debt+equity))	-19.1%	-23.5%		-9.4%	-12.5%	-14.1%
Underlying EPS, USc			21.6	25.7	22.3	19.9	19.9		Net debt to EBITDA	-0.7x	-0.8x		-0.4x	-0.6x	-0.6x
									RoCE	15.7%	17.3%		14.6%	12.2%	12.3%
Thomson Reuters consensus, USc					24.2	24.3	23.1		RoIC (after tax)	15.1%	15.5%		12.5%	8.9%	9.2%
DPS declared, USc			10.0	13.5	17.8	15.9	15.9		RoE	12.5%	12.7%		10.5%	9.2%	9.0%
Underlying EBIT									Cash flow statement
Aluminium			520	870	838	797	811		Operating cash flow	2,350	2,015		2,278	1,753	1,793
EBIT margin			16%	21%	21%	19%	19%		Capex (net of disposals)	-316	-430		-2,142	-588	-767
Manganese			577	837	738	461	421		Other cash flow	162	-29		0	0	0
EBIT margin			46%	52%	46%	34%	30%		FCF	2,196	1,556		136	1,165	1,026
Nickel			-16	120	-7	30	51		Equity shareholders' cash	1,783	1,363		58	1,086	956
EBIT margin			-4%	21%	-1%	6%	9%		Dividends and share buy backs	-455	-962		-1,180	-795	-803
Cannington			308	183	82	136	168		Excess cash	1,328	401		-1,122	290	153
EBIT margin			40%	31%	16%	25%	28%		Cash flow ratios
Energy Coal South Africa			212	276	183	195	178
EBIT margin			19%	20%	15%	14%	13%		Working capital days	38	46		40	41	41
Illawarra Metallurgical Coal			358	-62	200	78	52		Capex/EBITDA	15.1%	21.2%		110.5%	30.9%	40.0%
EBIT margin			32%	-9%	19%	8%	5%		FCF yield	26.4%	13.7%		1.2%	10.2%	9.1%
Other			-311	-450	-447	-313	-296		Equity shareholders' yield	17.9%	10.2%		0.5%	8.6%	7.5%
Underlying EBIT			1,648	1,774	1,588	1,384	1,385		Cash conversion	1.6x	1.0x		0.1x	1.1x	1.0x
Income statement ratios									Capital returns/market cap	4.6%	7.2%		9.3%	6.3%	6.3%
									Valuation
EBITDA margin			35%	33%	32%	28%	28%
EBIT margin			24%	23%	22%	18%	18%		Calculation of TP					$mn	ZAR/sh
EPS growth			731%	19%	-13%	-11%	0%		Aluminium					6,831	19.6
Dividend payout ratio			46%	53%	80%	80%	80%		Manganese					1,802	5.2
Input assumptions									Nickel					450	1.3
									Cannington					682	2.0
Aluminium, $/t			1,772	2,133	1,946	2,071	2,228		Hermosa					324	0.9
Manganese ore (44%, CIF China), $/mtu			5.72	6.79	6.32	5.24	5.41		Energy Coal South Africa					511	1.5
Silver, $/oz			18	17	15	18	18		Illawarra Metallurgical Coal					671	1.9
Hard coking coal, $/t			190	200	196	166	157		Corporate and other					-791	-2.3
$/AUD			0.75	0.78	0.72	0.75	0.80		Enterprise value as at 4-2-2019					10,480	30.1
Required breakeven price									Investments as at 30 June 2018					691	2.0
									Cash used in share buy-backs during 2019E					-379	-1.1
Aluminium, $/t			1,389	1,747	1,648	1,651	1,687		Net cash (debt) as at 30 June 2018					2,041	5.9
Manganese ore, $/dmtu			2.36	2.96	3.14	3.07	3.25		Equity value as at 2-9-2016					12,833	36.8
Silver, $/oz			-2.34	1.90	8.02	5.68	3.54
									Rounded to						37.0
Metallurgical coal, $/t			117	208	142	139	135		Share price on 1/2/2019						33.9
Sales volumes (South32's share)									Expected share price return						9.0%
									Plus: expected dividend yield						6.7%
Aluminium, kt			986	985	983	988	988		Total implied one-year return						15.7%
Silver, mn oz			16	12	12	12	12
Metallurgical coal, mnt			6.0	2.9	5.1	5.8	6.0		Share price range, ZAR:
Manganese ore (Samancor total), mnt			8.5	9.0	8.6	9.0	9.0		12-month high on 4/10/2018	45	12-month low on 22/2/2018				28
Attributable Cu eq volumes, kt			1,282	1,217	1,231	1,284	1,286		Price move since high	-24.2%	Price move since low				22.5%
Volume growth			-6.7%	-5.1%	1.2%	4.3%	0.1%		Calculation of discount rate
Contribution to FY19E underlying EBITDA									WACC	10.3%	Cost of debt				4.0%
	Illawarra								Risk-free rate	4.0%	Tax rate				30%
									Equity risk premium	5.5%	After-tax cost of debt				2.8%
	Metallurgical Coal					Aluminium			Beta	1.30	Debt weighting				10%
Cannington	14%
									Cost of equity	11.2%	Terminal growth rate				2.0%
						41%
Energy Coal South 5%									Valuation ratios
Africa
8%									Jun-YE	2017	2018		2019E	2020E	2021E
									P/E multiple	8.8x	10.2x		11.4x	12.8x	12.8x
Nickel									Dividend yield	5.2%	5.2%		7.0%	6.2%	6.2%
3%									Capital returns/market cap	4.6%	7.2%		9.3%	6.3%	6.3%
									EV/EBITDA	3.4x	4.5x		5.0x	5.3x	5.2x
	Manganese								P/B	1.0x	1.3x		1.2x	1.2x	1.1x
									NAV per share, $	2.0	2.1		2.1	2.2	2.2
	29%								NAV per share, ZAR	27	27		31	31	31

Source: Bloomberg, Thomson Reuters, Company data, Renaissance Capital estimates

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