Decarbonization Initiatives Will Strengthen Leadership In The Green Aluminum Market

Key Takeaways

• Hydro's decarbonization efforts and strategic partnerships enhance its leadership in green aluminum, positioning it for revenue growth and premium pricing.
  
• Expansion in recycled aluminum and restructuring of the extrusion business aim to drive sustainable growth and long-term competitiveness.
  
• Weak market demand, geopolitical tensions, and energy challenges pose significant risks to Hydro's revenue, profitability, and long-term financial stability.

Catalysts

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

• Hydro's focus on decarbonizing its value chain and a commitment to reach net zero by 2050, with strategies like the switch to renewable energy and development of carbon capture technology, is strengthening its positioning as a leader in the green aluminum market. This could lead to premium pricing and drive revenue growth.
  
• The strategic collaborations with companies like Rio Tinto for carbon capture and Siemens Mobility for circular economy initiatives are poised to enhance innovation and efficiency, likely boosting earnings by opening new high-margin market segments.
  
• Hydro's initiatives to expand its recycled aluminum capacity and its plan to increase it up to 4 million tonnes by 2030 positions the company for revenue growth in a market that increasingly demands sustainable products.
  
• The restructuring efforts in its extrusion business, focusing on cost reductions and efficiency improvements, aim to safeguard long-term competitiveness and profitability. This is projected to support its push towards achieving its EBITDA target of NOK 10 billion to NOK 12 billion by 2030.
  
• Hydro's renewable energy developments, through Hydro Rein, such as the sizable portfolio of wind and solar projects, are expected to secure stable and competitive energy supply, directly impacting operating costs and supporting stable revenue streams.

Norsk Hydro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Norsk Hydro's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 7.4% in 3 years time.
• Analysts expect earnings to reach NOK 16.6 billion (and earnings per share of NOK 7.85) by about March 2028, up from NOK 5.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK26.7 billion in earnings, and the most bearish expecting NOK11.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, down from 22.4x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 14.8x.
• 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 7.71%, as per the Simply Wall St company report.

Norsk Hydro Future Earnings Per Share Growth

Risks

• Hydro's extrusion segment continues to face weak market demand, particularly in Europe, leading to restructuring measures and job cuts, which could negatively impact revenue and net margins.
  
• Rising geopolitical tensions and ambiguous trade tariffs, especially those related to aluminum imports in the U.S., could cause market volatility and affect Hydro's revenue and profitability.
  
• The global alumina market remains sensitive to potential disruptions, and any adverse developments could lead to supply constraints and impact Hydro’s earnings and revenues.
  
• Despite efforts to increase production, falling alumina prices could affect aluminum prices, potentially lowering Hydro's revenue from aluminum sales.
  
• Energy supply challenges, particularly in volatile markets like Sweden and Brazil, have led to impairments and increased costs, potentially impacting Hydro's net earnings and long-term profitability.

Valuation

• The analysts have a consensus price target of NOK80.378 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 NOK100.0, and the most bearish reporting a price target of just NOK55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK224.1 billion, earnings will come to NOK16.6 billion, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of NOK65.72, the analyst price target of NOK80.38 is 18.2% 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.