Low-carbon Aluminum And Renewable Energy Will Define Future Markets

Key Takeaways

• Hydro aims to boost revenue by leveraging low-carbon aluminum demand and strategic partnerships, boosting green premium acceptance.
  
• Cost optimization and trade resilience efforts aim to sustain margins and stabilize earnings amid market challenges.
  
• Geopolitical uncertainties and market challenges could pressure Hydro's margins and delay revenue recovery in aluminum and recycling segments, affecting long-term profitability.

Catalysts

Engages in the power production, bauxite extraction, alumina refining, aluminium smelting, and recycling activities worldwide.

• Hydro expects to capitalize on the growing demand for low-carbon aluminum, reinforced by strategic partnerships and investments, potentially boosting revenue and market share as companies increase their willingness to pay green premiums.
  
• The investment in a new wire rod casthouse and strategic offtake agreement through 2033 reflects confidence in future demand for renewable energy infrastructure, enhancing long-term revenue potential and supporting the greener earnings uplift target of NOK 2 billion by 2030.
  
• Cost optimization and restructuring efforts, including closing less productive facilities and improving operational efficiency, aim to reduce costs and sustain net margins in the face of challenging market conditions.
  
• Hydro's acceleration of its cost improvement program in Recycling, targeting 1/3 of its 2030 goal by 2025, should lower expenses and improve earnings resilience as margins remain under pressure.
  
• The strategic focus on building resilience against trade uncertainties by optimizing production and sourcing across North America may mitigate adverse impacts while maintaining stability in earnings and cash flow amidst macroeconomic volatility.

Norsk Hydro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Norsk Hydro's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 6.3% in 3 years time.
• Analysts expect earnings to reach NOK 13.6 billion (and earnings per share of NOK 6.67) by about May 2028, up from NOK 5.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK17.3 billion in earnings, and the most bearish expecting NOK10.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 18.6x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 1.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Norsk Hydro Future Earnings Per Share Growth

Risks

• Geopolitical and trade uncertainties, including rapidly changing tariffs, could lead to broader economic slowdowns, potentially impacting Hydro's revenues and margin pressures in both the Aluminum Metal and Hydro Extrusions segments.
  
• Lower alumina sales volumes and increased raw material costs could negatively affect Hydro's earnings, especially if alumina market conditions remain tight outside China, pressuring the cost structure in Bauxite & Alumina.
  
• Pressures from tight scrap supply and margin compression in Recycling are persistent, which might worsen due to increased market unpredictability, potentially affecting the gross margins and long-term profitability of Hydro's recycling operations.
  
• Extrusion demand in key regions like Europe and North America remains soft, with moderate levels of growth expected, which could delay revenue recovery in the Extrusions segment and reduce Hydro's overall EBITDA.
  
• Market conditions in recycling and extrusion might deteriorate due to ongoing uncertainties, hampering Hydro's target of achieving NOK 10 billion to NOK 12 billion in Extrusions EBITDA by 2030 and affecting future earnings forecasts.

Valuation

• The analysts have a consensus price target of NOK68.667 for Norsk Hydro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK85.0, and the most bearish reporting a price target of just NOK53.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK216.9 billion, earnings will come to NOK13.6 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of NOK54.6, the analyst price target of NOK68.67 is 20.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.