alcoa inc final
TRANSCRIPT
Alcoa Inc. (AA)
Senior Analyst: SteveJunior Analyst: Raza Khan,
Mohammed Shammasi, Alex Blackard
Company Information
• Location: New York, New York• Ticker Symbol: AA• Beta: 1.03• Traded on: NYSE• Current Share Price: $8.93/share• Market Cap: $11.70 Billion
Business Segments
• Upstream Operation• Includes mining, refining, smelting, and energy production• Mining Bauxite – bauxite is refined to alumina – alumina is
processed to aluminum• Prone to aluminum price change
• Midstream Operation• Converts aluminum into aluminum sheet plates and rolls
• Downstream Operation / Fabrication• Fall in Al. Prices & premium is good for the fabricators
• Al. premium is the delivery prices
• AA is making acquisition on the fabrication space
Key Operations
of Alcoa
Global Primary Products
(Upstream Operations)
Engineered Products
(Downstream Operations)
Global Rolled Products
(Midstream Operations)
Constant Innovation• Created world’s lightest heavy duty wheel
• 47% lighter than steel wheel of same size• Can Help Save Up To 1,400 Pounds Per Rig
• Created high-strength aerospace-grade aluminum• Alco is a major supplier to Samsung – Galaxy S6 and S6 Edge• Smartphone metal frames are expected to grow at 250% by
2016.
• Developed an aluminum foil that’s 1/3rd of the thickness of human hair – aseptic foil.
• Used by the milk packaging industry in Brazil.
Porters 5 forces
Competitiv Rivalry
Threat of Substitute
Threat of New EntrantsBargaining Power of Supplier
Bargaining Power of Customer
0
5
10
Porter's 5 ForcesPorter's 5 Forces
Corporate GovernanceC Level Executives
Years with Company Shares Owned
CEO Klaus Kleinfeld
8 3.5M
CFO William Oplinger
15 285k
CLO Audrey Strauss
3 150k
Executive VP Olivier Jarrault
13 445k
Executive VP Robert Wilt
16 163k
Board of Directors• 11 out of 12 are independent• Board member Ratan Tata
• Indian steel magnate
Financial Statements Analysis
Financial Statement Analysis
Ratio Comparisons
Growth through Acquisitions & Joint Ventures• Joint Venture in Saudi Arabia with Ma’aden
• 30 year venture• Mining, refining and smelting
• RTI Metals• Global supplier of titanium and specialty metal products and services• Expected to contribute 1.2 billion in revenue by 2019• EBITDA margin expected to increase by 25% by 2019
• TITAL• leader in titanium and aluminum structural castings for aircraft engines
• Firth Rixson• Leading jet engine component manufacturer• $2.85 B acquisition• Expected to add $350 Million to EBITDA in 2016.
Industry Report/Competitive Position• Falling Aluminum
Prices
2008 2009 2010 2011 2012 2013 20140.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
9.60% 9.20%10.60%
9.50%
7.80% 7.70% 7.40%
China's GDP GrowthWorld Aluminum Production 2014
Africa Asia (ex.China)GCC ChinaN. America S. AmericaW. Europe OceaniaRow Est. Un-reported
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-6.00%-5.00%-4.00%-3.00%-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%
China's Aluminum Production YoY Growth
2014 2015 2016 2017 2018 2019 20201500
1550
1600
1650
1700
1750
1800
Global Aluminum Demand
COMPANY HAS REDUCED SMELTING CAPACITY
A 29% decrease since 2011.Due to High Unit Production costs – electricity costs, labor costs or maintenance expenses.
In 2014, AA closed: - Portovesme plant (Italy) 150 Tonnes- Point Henry Plant (Australia) 190
tonnes- Surinam refinery by 74 KMT
Company Transition
•Increasing use of Aluminum in automobile production
•US govt. standards mandate that by 2025, automakers must increase corporate average fuel economy (CAFÉ) to 54.5 miles from 35.5 by 2025.
•Using aluminum body reduces vehicle’s weight by 30% increasing the fuel economy.
2014 - $ 1B Multi-year Contracts with Boeing – aluminum sheets and plate products 2014 -$1.1B 10 Year Pratt & Whitney – more than $2Billion – Jet engine components 2015 - $1.1 B 9 Year Titanium Contract for Lockheed’s F-35 Fighter Jets2015 - $1 Billion Parts deal with Airbus – Fastener contract
Aerospace Industry
Automobile Industry
Source: Deloitte
Source: KPMG
Commercial Aircraft orders and production
Global Demand: No. of Passengers Forecast
Source: Fed. Aviation Admin.
Financial Statements Forecast Growth RateAlumina 2.04%Primary Metals 0.17%Global Roleld Products 3.94%Engineered Products & Solutions 6.99%
Growth RateAlumina 5.69%Primary Metals 3.25%Global Roleld Products 3.89%Engineered Products & Solutions 11.64%
25 M Class B Convertible
Shares @ $1 Par value
Convertible end of 2017 @ 10 = 1 Common Shares
Total $70 M – Total Common Stocks = $1.4B
2016 2017 2018 20190
5000100001500020000250003000035000400004500050000
Balance Sheet Forecast
Total Asset Total Liabilities Total Equity
2016 2017 2018 20190.0
1000.02000.03000.04000.05000.06000.07000.08000.09000.0
10000.0
Revenue Forecast
Alumina (Upstream Operations)Primary Metals (Upstream Operations)Global Roleld Products (Midstream Operations)Engineered Products & Solutions (Downstream Operations)
2016 2017 2018 20190
200400600800
1000
Operating Income Forecast
Alumina (Upstream Operations)Primary Metals (Upstream Operations)Global Roleld Products (Midstream Operations)Engineered Products & Solutions (Downstream Operations)
RELATIVE VALUATIONS
AA Norsk Hydro RUSALAlum. Co. of China RIO Tinto CENX
Price Range
P/E 14.95 12.01 4.36 13.13 62.36$7.16-21.57
Enterprise Value 29979.1 122949.9 19078.1 24025 107602.2 2264.6
EV/EBITDA 12.55 9.37 11.85 61.34 5.38 10.71$7.4-$16.3
Valuation
DIVIDEND DISCOUNT MODEL
Cost of Equity (ke) 6.68% (CAPM)
Short term Growth Rate 0.2% (ROE * Retention Ratio)
Long-term Growth Rate 0 – 4.8% (Rf + Inflation)
Current DPS $0.12 / Share
Intrinsic Value Range $6.19 - $10.81
Discounted Cash Flow2016 2017 2018 2019
Owner’s Earning
230 1251 1320 1392
WACC Weight Cost Equity 54.50% 9.76% 5.3%Debt 39.90% 3.25% 1.3%Preferred equity 5.60% 9.13% 0.5% 7.1%Effective Tax Rate 43.31%
Price Range: $ 9.7 – 24.5
Alcoa's Valuation- Football Field
Min Max Average WeightFinal Value
P/E 7.16 21.57 14.365 5% 0.71825DDM 6.19 10.81 8.5 10% 0.85EV/EBITDA 7.4 16.3 11.85 5% 0.5925DCF 9.7 24.5 17.1 80% 13.68
Final Intrinsic Value $ 15.84
P/E
DDM
EV/EBITDA
DCF
0 5 10 15 20 25 30
7.16
6.19
7.4
9.7
14.41
4.62
8.9
14.8
Final Value: $15.84
Final Recommendation
Summary:1.Efficient Management2.Big player in the Market3.Constant Innovation and Transition
to High Margin Segments
Business Strategy
• GROWTH BY SALES• Growth by Acquisitions
• Which ones?• Which ones?• Which ones?
• Excellent Management
Value Added Business
• Converts primary aluminum into sheets. • Used in packaging, automotive, and
aerospace industries.
Global Leader in Aerospace Industry
Developed more than 90% of all aerospace alloys.
Churn RateGrowth RateMarket Size
Du Pont Analysis
Industry Ratios & Competitors
Total Asset and CFO increasing
25 M Class B Convertible Shares
@ $1 Par value
Convertible end of 2017 @ 10 = 1
Common Shares
Total $70 M – Total Common Stocks =
$1.4B
Class B Convertible Shares
Building a Multi-Material Company• Alcoa introduced Aluminum foil in 1910.• Most Growth Capex towards Value added business• Still small market presence in emerging markets
such as India and Brazil.
Automotive Industry• Increasing use of Aluminum in automobile
production• US govt. standards mandate that by 2025,
automakers must increase corporate average fuel economy (CAFÉ) to 54.5 miles from 35.5 by 2025.
• Using aluminum body reduces vehicle’s weight by 30% increasing the fuel economy.
2014 - $ 1B Multi-year Contracts with Boeing – aluminum sheets and plate products 2014 -$1.1B 10 Year Pratt & Whitney – more than $2Billion – Jet engine components 2015 - $1.1 B 9 Year Titanium Contract for Lockheed’s F-35 Fighter Jets2015 - $1 Billion Parts deal with Airbus – Fastener contract
Contracts in Place
Upstream Company• World’s largest bauxite and alumina producer
• 4th largest aluminum producer with 3.4 million tons smelting capacity
• Major supplier in aerospace sector
• Leading supplier in brazing sheet and auto sheet
Innovation: Currently in talks with major automotive producers to adopt Micromill productsMicromill products:• 40% more formable and 30% stronger
than aluminum• 30% lighter than parts made from high
strength steel• Reduces time to transform molten
metal into aluminum coil from 20 days to 20 min.
Downstream Segment: Engineered Products Segment
• Fabricates aluminum into custom shapes and sizes for the end users• Divided into 5 groups1. Power and propulsion – It manufactures parts for jet engines and
industrial gas turbines2. Fastening systems – It manufactures fasteners for aerospace and
automotive3. Buildings and construction systems – It manufactures commercial
architectural systems4. Wheel and transportation products – It manufactures commercial vehicle
wheels5. Forgings and extrusions – It manufactures large and complex fabricated
parts for use in various end industries• World’s largest aluminum-lithium facility in Indiana that’ll produce an alloy
with increased strength ratio. Will be adopted mostly by aerospace companies.
• Alcoa contracted $100M in revenues for 2017.
Innovation: Invented World’s lightest wheel – Ultra ONE. 40lb or 47% lighter than traditional steel wheel.