cfa institute research challenge...source: team estimates & annual report bahrain polytechnic...
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CFA Institute Research Challenge
Hosted by
CFA Society Bahrain
Bahrain Polytechnic
Company: Aluminium Bahrain (Alba)
Exchange: Bahrain Bourse/London Stock Ex.
Ticket Symbol: ALBH
Sector: Manufacturing Sector
Industry: Aluminium Industry
Valuation Date: 16th January 2018
Recommendation: BUY
Current Price (16th Jan 2018): BHD 0.620
Target Price: BHD 1.072 (+72.85%)
SUMMARY Aluminium Bahrain (ALBA), established in 1968, was the first aluminium smelter in the
Middle East with a total production of 981,016 metric tonnes as of 2017. The company
engages in manufacturing aluminium and aluminium related products.
The one year forward blended 50:40:10 target price of BHD 1.072, upside of 72.85% from
the current market price of 620 fils on 16th January 2018, is based on the following key
factors;
• Alba will become the largest single-site aluminium smelter in the world following the
operation of Line 6 expansion project. This will elevate their status and make them a
prominent competitor in the aluminium industry.
• With the expectation of approximately 5% YoY growth for the next 5 years in demand
and decreasing supply by 2.2% of aluminium, Alba will benefit from higher aluminium
prices. The forecasted market deficit will be driven by reduction in Chinese production
of aluminium for environmental purposes.
• The imposition of trade barriers on China’s aluminium will be giving Alba competitive
advantage due to FTA agreement with USA.
• Despite rising price of alumina, green petroleum coke, and carbon, the expected rise
in aluminium prices will increase Alba’s revenue on a yearly basis. Considering Project
Titan, costs are expected to remain low.
• Alba dominates a monopolistic position in Bahrain’s market, being the only producer
of primary aluminium locally. The high barriers of entry shield them from competition
locally. Also, 41% of their products are secured by the downstream industries in
Bahrain.
• Alba pays yearly dividends, except for 2018 which will be zero given self-financing of
Line 6 loan. However, dividends will be distributed thereafter given the rise in
production, net income and cashflows due to operation of Line 6.
Company profile
16th January 2018
Market Capitalization BHD 877,399,820
Market Share Price BHD 0.620
Outstanding Shares 1,415,161,000
52-Week High-Low 0.620 – 0.266
2-Year Average Beta 0.97
Average 3m Volume 223,188
Key Financials (Year ended 2017)
Dividend Yield 6.9%
EPS 24 fils
P/E Ratio 10.16
EV/EBITDA 7.58
ROA 2%
Net Profit Margin 4%
Debt Ratio 0.42
Valuation Summary
Valuation Approach Weight Price
DCF 50% 1.496
Multiples 40% 0.668
Ben Graham 10% 0.643
12-Month Target Price BHD 1.072
Target Price Upside 72.85%
Source: Team Estimates & Annual Report
Bahrain Polytechnic Student Research
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Alba Historical Stock Price since IPO Source: Bahrain Bourse
COMPANY ANALYSIS
BUSINESS DESCRIPTION
COMPANY Aluminium Bahrain B.S.C., widely known as Alba, is the effort of the output of the Kingdom
of Bahrain’s government to diversify production, reducing the reliance on oil and gas
activities. Through the continuous advancement in its technological innovation and full
involvement in enforcing CSR, training, safety, health and environment guidelines, Alba
has managed to be one of the largest aluminium smelters globally (Table 1). Alba was
established in 1968 and officially launched its operations in May 1971, becoming the first
aluminium smelter in the Middle East with a total production of 120,000 tons per annum.
The company became public on 23 November, 2010 and launched its IPO at BD0.900 per
ordinary shares and USD11.97 per GDR (1 GDR = 5 ordinary shares) which are traded
through the Bahrain Bourse and London Stock Exchange under the symbol “ALBH”. 75%
of the total trading size were ordinary shares and Global Deposit Receipts (GDRs) through
institutional investors, while 25% were ordinary shares available in retail offering. The
Company also has a subsidiary incorporated in the United States of America. The market
capitalization as of 16th January 2018 is BHD 877,399,820. Today, Alba produces over
971,000 metric tons per annum (mtpa) promising the highest quality of aluminium. As of
2016, Bahrain is ranked as the 9th largest producer of aluminium globally and 2nd largest
aluminium smelter in the MENA region1. (Appendix 15)
PRODUCT MIX/PRODUCT RANGE Alba not only produces aluminium products, but other by-products as well. Primary
products include, standard ingots, rolling slabs, foundry alloy ingots, extrusion billets, t-
ingots and liquid metal (Figure 1). Other products include, anodes, power, water, calcined
coke. Alba insures 99.86% purity of high-quality aluminium in all products (Appendix 17).
The value-added sales accounted for 56% in 2016, a 12.5% drop from last year.
Furthermore, Alba imports raw material (alumina) from BHP Billiton, Alcoa and Hydro.
CONSUMER MIX/ CONSUMER SEGMENT The company’s main consumer sectors include; automotive, consumer products,
commercial, residential, transport, and packaging industries. Alba’s main consumer base
are regional clients and the typical length of the company’s commercial relationships with
its top five consumers is more than 28 years (Figure 2). Alba consistently work in
collaboration with their customers through technical support services to update their
products and boost productivity.
COMPANY STRATEGIES Adherence to safety and environment management
Alba prioritizes safety in the working environment by conducting regular upgrades to its
safety system through the company’s Risk Assessment Committee. Additionally, all
employees are trained in health and safety by OHSAS 18001 (Occupational Health and
Safety) certified personnel. Alba is recognizable for being the first aluminium smelter in
the world to have not a single Lost Time Injury (LTI) in more than 9,200,000 work hours2.
Since 1990, the company has invested over USD589million in environmental conservation
in the form of fume treatment plants focusing on waste management and reduction of
harmful gas emissions.
Investment in training and development
Alba has continued to provide training for over 40 years in order to develop the skills of
its employees up to international standards. Alba’s commitment to human asset
development led to opening a Training Centre which consists of workshops and smart
classrooms. The Centre offers training in leadership, automotive, mechanical, electrical,
instrumentation and hydraulics and pneumatics.
Customer satisfaction
Alba commits to maintaining strong relationships with its customers to build long-term
clientele. As a continuous effort to increase efficiency, Alba offers competitively priced
products yet retaining the highest quality of its aluminium with 99.86% metal purity.
Technological Development
Constant upgrades in the technology used in production is implemented to further
increase production and improve efficiency. Alba’s recent upgrade from “EGA DX+” to
“EGA DX+ Ultra” for Line 6 project is expected to increase the company’s production by
540,000 mtpa. This technology improves energy efficiency allowing Alba to increase
output by consuming less energy, thus, reducing the company’s production costs.
Table 1 Alba’s Facilities Source: Alba Website
Facility Type # Facility Details
Main Potlines 5 Potline 1-2-3-4-5 Cast Houses 2 971,420 mtpa Carbon Plants 3 - Fume Treatment Plants
11 -
Power Plant 4
PS 1 (282MW) PS 2 (168MW) PS 3 (860MW) PS 4 (939MW)
Petroleum Coke Calciner
1 550,000 mt per day
Seawater Desalination Plant
1 41,000 m3 per day
Green Oasis -
13 hectares 15,000 trees/shrubs Fruit/vegetable garden Artificial lake
30%
34%
11%
11%
14%
Liquid Metal Extrusion Billet
Standard Ingots Rolling Slabs
Foundry Alloys
Figure 1 Sales by product (2016) Source: Alba's Website
41%
17%
14%
18%
10%
Domestic Asia MENA Europe Americas
Figure 2 Sales Revenue by Geographic Location Source: Alba Annual Report 2016
0
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Degree ofCompetition
Threat ofNew
Entrants
Threat ofSubstitutes
BargainingPower ofSuppliers
BargainingPower of
Customers
Figure 3 Porter's 5 Forces Appendix 11
FUTURE DEVELOPMENT Alba’s last expansion was completed in 2005 when the company introduced Line 5 to the
main site, increasing production by 307,000mtpa (total output=827,000 mtpa). Today,
Alba’s line 6 is under development increasing production to 1,540,000mtpa (Appendix 16).
Furthermore, Alba initiated plans of expanding its plant and work on developments to
further strengthen its operations within the nation by continuously supporting the non-
oil industry and Bahrain’s community to align with the Kingdom’s 2030 Vision.
CORPORATE GOVERNANCE
CORPORATE STRUCTURE Board of Directors & Management Team
The company has 10 members in the Board of Directors with diversified backgrounds and
experience, 1 out 10 members of the board are non-independent, executives (Appendix
13). Furthermore, the board works alongside with 3 sub-committees: The Board Audit
Committee (BAC), the Board Executive Committee (BEC), and the Board Nomination and
Remuneration Committee (BRC). The determination of Alba’s business operations
direction and its long-run strategy is the main responsibility of the BOD. The management
team has 55 members inclusive of the 6 executive managers (Table 2 & Appendix 14). The
primary responsibility of executive managers in Alba is managing the daily operations and
enacting strategies and polices set by Board of Directors. They receive compensation in
the form of salaries, bonuses, gratuities, perquisites, pensions.
Shareholders
Alba’s ownership is majorly held by Mumtalakat Holding Company (a sovereign wealth
fund owned by Bahraini government) with 69.40% share, 20.60% is owned by Sabic
Industrial Investment Company (Saudi chemical manufacturing company), and remaining
10% of ownership is by the public, out of which 0.74% is held by Alba itself (Figure 4).
Employees
The company provides a healthy environment for employees and is the first company in
Bahrain to create a Union in 1975. Moreover, Alba has committed to Bahrainisation and is
the largest employer in the Kingdom. As of 2017, it has a total of 2,681, of which 84% are
Bahraini nationals.
CODE OF CONDUCT Alba’s corporate governance structure is completely aligned with The Kingdom’s
Commercial Companies Law and Corporate Governance Code issued by Ministry of
Industry, Commerce and Tourism. Furthermore, Alba complies with the International Best
Practices and Corporate Governance Module issued by The Central Bank of Bahrain. The
company’s code of conduct outlines a set of rules that governs five main subjects:
Valuing People: fair treatment, respect, non-harassment policies, providing equal opportunity. Safety, Health and Environment: commitment to environment and strict safety rules. Good Citizenship and Social Responsibility: key attributes towards the community and political relations with the government. Ethical Business: eliminate unlawful acts such as corruption, bribery, conflicts of interest and frauds. Information and Confidentiality: protecting confidential information and methods of representing Alba.
SOCIAL RESPONSIBILITY Alba is determined to create a positive impact and improvement on the society and
preserving the environment by contributing and initiating in wide array of activities. In
sports field, Alba is the leading entity in supporting special needs athletes. Furthermore,
Alba also participates in Gulf Air Formula One Grand Prix. Alba dedicated a community
services team that supports unprivileged locals financially by raising funds and creating
charity events. As for healthier environment, Alba has contributed alongside the
government in restoration of Malkiya beach as well as providing sponsorship for
environmental entities and numerous events such as The International Garden show. Alba
has spent USD$589 million for environmental conservation.
INDUSTRY ANALYSIS
INDUSTRY OVERVIEW
• Aluminium consumption increased 5% YoY in 2016; summing up to 59.6 million
metric tons. Demand forecasted to increase 4-5% for 2018 and 5-6% for the next 5
years, reaching 65.9 million metric ton in 2020.
• Rising demand from transportation, electrical and machinery sectors.
• Aluminium supply growth to 2.2% YoY due to Chinese production curtailment.
• Increasing trade barriers against China could diminish world production supply.
• China aims to reduce their reported production by 30% to lower pollution levels and
aluminium oversupply in the market.
Table 2 Executive Managers Source: Alba's Website
Name Current Position Tim Murray Chief Executive Officer Ali Al Baqali Chief Supply Chain Officer Khalid A.Latif Chief Marketing Officer Amin Sultan Chief Power Officer Waleed Tamimi Chief Admin Officer Hassan Noor Acting Chief Operations Officer
Figure 5 Aluminium Output in China vs. Rest of World Source: International Aluminium Institute
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Supply Demand
Surplus/Deficit % Change in Supply
% Change in Demand
Figure 6 Refined Aluminium Demand and Supply Source: Wood Mackenzie, RBC Capital Markets estimates
Figure 4 Alba's Shareholders Holding Source: Alba’s Website
69.40%
20.60%
2.47%0.74% 6.79%
Bahrain Mumtalakat Holding Co. BSCSaudi Basic Industries CorpNorges Bank Investment ManagementAluminium Bahrain BSCPublic
• Increasing raw material costs is pressuring the cost of production but marginal
revenue exceeds marginal cost.
GLOBAL ALUMINIUM INDUSTRY Direction of Market Balance: Is it a Deficit or Surplus?
Alba operates in the aluminium industry that has faced challenging pressures on
companies’ profits and valuations. The main reason behind such challenges is China, who
started oversupplying aluminium mainly from 2013, more than the world producers,
distorting aluminium prices and market balance (Figure 5). It could be observed from
Figure 6; aluminium market recorded a surplus throughout the years except for the year
2014 (-376,000 tons) and 2016 (-913,000 tons)3. The year 2016, market deficit exceeded
the 2014 deficit, which could be attributed to China’s unexpected trimming of production
(Figure 7). A relative balance of 344,000 tons and global deficit of 538,000 tons for 2017
and 2018 is forecasted, a conclusion drawn based on the following:
Assumptions: China’s output curtailment reaches 4.5 million tons in 2018.
Curbing of China’s output for environmental purposes needs to be 600,000 tons in 2018
despite expansionary fiscal policies that will drive growth in short-run.
Fall in growth of Chinese consumption by 4.5% in 2018
Rise in China’s net exports to 800,000 tonnes in 2018 from 500,000 tonnes in 2017.
Risks: Pump of new projects mainly by China’s State-Owned-enterprises
Fluctuations in aluminium prices following response to China supply policy
Rise in prices of alumina, carbon and power due to cost-push inflation
SUPPLY & DEMAND DRIVERS OF ALUMINIUM Demand Trend
In 2016, the consumption summed up to 59.6 million metric tons that is approximately
5% YoY higher4 that than the world’s real GDP growth rate of 3.2% for 2016. The demand
rate rises to 5.3% in 2017. China owned global demand share of 14% in 2000; exceeding
50% in 20175. United States, Germany, India and Japan are considered chief consumers of
aluminium after China.
Demand Outlook
Aluminium is the 2nd most consumed metal, headed by steel, due to its intrinsic
characteristics such as 100% recyclability, durability, versatility, conductivity, lightweight
and strength without comprising safety and performance. Steel is being replaced by
aluminium as per the EU emissions scheme and the Corporate Average Fuel Economy
which supports steel substitution as it is considered more environmentally friendly since
it is lighter which enhances fuel efficiency and reduces Co2 discharges (Appendix 17).
Aluminium consumption is expected to reach 65.9 million metric ton in 2020 6 while
demand is expected to further grow by 5-6% in the next 5-10 years (Figure 8)7. These
demand growth rate exceed the world’s forecasted real GDP growth rate of 3.6%, 3.7%
and 3.8% in 2017, 2018 and 2022 respectively8. The increase in demand growth is due
transportation, electrical and machinery sectors (Figure 9). China is anticipated to adopt
expansionary fiscal policies to achieve their target of multiplying their real GDP from 2010-
to-2020 as it was expected to ease from 6.3% to 5.7% YoY; thus, driving demand for
aluminium in real estate and transportation sector; while US has major infrastructure plans
worth USD 1 trillion9. Regions, such as India, that are unable to produce aluminium locally
due to high costs, rely on imports providing Alba with exporting opportunities especially
since India would require large supply quantities which can be granted by the Line 6
expansion project. The reason being that India is viewed to boost aluminium consumption
which increases from 3.3 million mt (2015/16) to 5.5 million from 2020 to 2021 as a result
of government initiatives such as “Smart Cities”, “Make in India”, rural electrification,
“Housing for All” and freight corridors10.
Supply Trend
The top individual aluminium producer is a Russian Company, UC Rusal, with total output
amounting to 4,173,000 mt, followed by Alcoa in USA with 3,742,000 mt11. However,
China altogether is ranked the highest regional producer with a global aluminium output
share exceeding 50%. The list of top producers as of August 2017 are listed in Table 312.
The 2nd highest regional aluminium producer is the GCC with a total output reaching
5,197,000 mtpa, of which Alba contributes 17.4%; while Alba represents 1.64% of global
supply (Figure 10)13. It is forecasted that the share of aluminium production will decrease
and there will be a slowdown in supply growth to 2.2%. This slowdown is mostly due to;
information collected regarding trade barriers and geopolitical tensions, China revamping
supply policies and the cost-push inflation in raw materials14.
Trade barriers and geopolitical tensions
The governments in Europe, India and US are enacting protective measures against
exports from China by levying import duties or provision of subsidies to producers’
Table 3 Top Aluminium Producers (August 2017 in million mt)
Source: The Balance Producer Country Output UC Rusal Russia 4.173 Alcoa Inc. USA 3.742 Aluminium Corp of China China 3.502 China Power Investment Corp China 2.693 Rio Tinto Alcan Inc Canada 2.174 Norsk Hydro ASA Norway 1.985 China Hongqia Group Ltd China 1.821 Shandong Weiqiao Aluminium & Power Co
China 1.715
Shandong Xinfa Aluminium & Electricity Group Ltd.
China 1.630
Dubai Aluminium Co. UAE 1.420
Figure 9 Demand of Sectors for Aluminium Source: CRU
Figure 7 Global Aluminium Supply and Demand Source: Bloomberg, RBC Capital Markets estimates
Figure 8 Global Primary Demand (YoY Growth % & mt) Source: CRU
locally 15 . This is due to low-cost input and artificially cheap loans given to Chinese
producers, hindering the world’s aluminium capacity. India increased import duties for
primary aluminium and aluminium products to 7.5% and 10% respectively 16 . US
preliminary duties on all Chinese aluminium foil products are around 96.81% - 162.24%.
Alba will have competitive advantage over China given their Free-Trade Agreement (FTA).
China’s supply-revamp policies
From April 2017 onwards, the shutting-down of unlicensed smelting capacity, could result
in loss of 4 million tpa. Secondly, the introduction of environmental tax to reduce pollution
will impact production significantly. China plans to reduce their reported production by
30% to lower pollution levels and aluminium oversupply in the market. Thus, reported
production dropped by 2.3% within a month17.
Cost-push inflation in raw material costs
Cost of bauxite, alumina (extracted from bauxite), and anode baking capacities are
pressuring raw material costs. China plans on trimming 30% of alumina production and
30% of anode baking and calcining capacities. This will reduce Chinese exports to
aluminium smelters and will heighten costs for the whole world, including Middle East.
These reforms will increase the aluminum marginal cost of production (exclusive of
overheads, labor and management costs) over the years (Figure 11). Considering the main
components of production without the benefit of secured contracts, Alba still produces a
positive margin due to rising aluminium prices.
LONDON METAL EXCHANGE (LME): ALUMINIUM PRICES Aluminium prices dropped from 2013-2016, hitting rock bottom in 2015 with $1423.5 per
ton. Aluminium became the 2nd best performing base metal in 2017/Q1 compared to
being 2nd worst in 2016. If the bullish scenario continues as a result of expected global
aluminium deficit in 2018, the LME aluminium prices will be as follows in 2018:
Metal Bulletin Research outlook: Rise to an average of $2,090 to $2,195 per ton.
Banks & trading companies’ outlook: Rise to an average of $2,400 and $2,500 per ton.
Other’s outlook: Rise to an average of $2,000 and $2,200 per ton.
BAHRAIN MACROECONOMICS The lucrative growth in non-oil sectors, which generates 80.7% of Bahrain’s real GDP,
powers Bahrain’s economy against benign international and national economic scene. The
non-oil growth slipped down slightly from 5.2% to 4.3% in Q2 and Q1 of 2017
respectively18; this is partially attributed to power outage for 3 hours in Alba, decreasing
approximately 3%-5% of the company’s entire aluminium output. Bahrain is expected to
experience macroeconomic headwinds, where the foreign-exchange reserves in the
Central Bank of Bahrain depleted by 75% since 2014. Without aid or lift in oil prices,
Bahrain will struggle to be pegged to US Dollars at BHD 0.376. Hence, Bahrain could be
withdrawing subsidies on energy products, increasing Alba’s cost of production. Also,
financial aid is expected to be extended to Bahrain as it is viewed less costly compared
with BH devaluing the currency that will reverberate regionally. Still, Alba is viewed as solid
and financially stable; hence, it receives competitive offers from banks to finance Line 6
that will boost Bahrain economic position. (Appendix 12: PESTL analysis). Thus, its internal
strength and Line 6 expansion will shield its stock price from any adverse event.
LOCAL ALUMINIUM INDUSTRY The growth drivers of Bahrain’s industrial and logistic sectors are key infrastructure
projects worth $33 billion. Among these projects, Alba initiated their Line 6 brownfield
project to increase production capacity by 54%. With expectation of additional 250,000
mtpa output sold domestically, local downstream firms plan to take advantage and
expand their own businesses to accommodate the growing production, creating a wider
consumer base for Alba. Furthermore, Alba’s major shareholder, Mumtalakat, entered into
joint venture with synergies casting of India in 2015 for building a downstream aluminium
plant in Bahrain worth $150 million that will commence operations with output capacity
of 25,000 tons in Q4/2017 to absorb Alba’s output when line 6 starts in 2019.
COMPETITIVE POSITIONING
Monopoly in local aluminium industry & high barriers to entry
Alba is the top manufacturer within Bahrain’s aluminium industry due to its monopolized
position within the market for aluminium smelting. With the 54% increase in output to 1.5
million mtpa (Figure 12), Alba will have a more competitive edge in the market due to Line
6 expansion. Due to its monopolized market, it is difficult for new entrants to establish a
position in the market. Alba has reached high levels of economies of scale due to its
increased production and advanced technology levels (EGA DX+ to EGA DX+ Ultra). With
the addition of line 6, Alba will be able to lower their costs even more due to operational
efficiency and lower energy consumption due to technological advancement.
Figure 12 Alba Yearly Production (mtpa) Source: Alba Website
Figure 10 Aluminium Production 2016-2017 Source: The World Aluminium
Figure 11 Alba’s Marginal Profit & Total Cost Estimate Source: Team Estimates
1968 2002
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1479.6 1466.3
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2000
3000
4000
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2017 2021
LME Aluminium Total Cost Margin
Value-added products are key priority
Alba is among the very few companies who have their own on-site calciner and carbon
plant allowing them to control operations efficiently and maintain optimum production
of value-added products which comprises of more than half the sales. Alba closed 2017
with value-added sales averaging 57% of total shipments against 56% in 2016.
Advantage of domestic natural resources & low production costs
The initiation of the aluminium industry was due to availability of natural gas – a main
component of aluminium production. Alba secured a 10-year gas supply contract in 2015
with NOGA (National Oil and Gas Authority) at a fixed price formula. Also, while electricity
is provided at a lower price than the market, Alba generates their own electricity through
their production process. With Project Titan and other advantage through the government
for land use, construction and utilities, Alba has high competitive advantage.
Advanced human capital and government support
Alba has invested greatly in their human capital through extensive workshops and
programs. Alba is the first aluminium smelter in the world to have zero lost time injury
(LTI) in +9,200,000 working hours. Also, since the government owns 50%+ of the company
through Mumtalakat Holding Company (sovereign wealth fund), the government is
encouraged to continuously support the smooth process of Alba’s operations.
Strategic location for logistics
Bahrain has a strategic location, next to Saudi Arabia (largest economy in GCC),
connecting via a causeway. Bahrain has easy access to the Gulf and MENA region due to
its prime location. Similarly, Alba has its own port facilities to receive shipment of raw
materials. Furthermore, Alba has a valuable physical position within the industry as the
downstream industry is located few minutes away making transportation easy and cheap.
Regional competition ranks Alba at 2nd place
Top 6 producers of Aluminium in the GCC are listed in Table 4. With UAE’s Emirates Global
Aluminium taking first place, Alba is ranked at 2nd. While UAE poses to be competition for
Alba, it is asserted that with the start-up of line 6, Alba will improve in its ranking further.
GCC accounts for one-tenth of global production; where 60% of production is exported19. This indicates that Alba has access to a wider market, reducing concentration domestically.
FINANCIAL ANALYSIS
INVESTMENT SUMMARY
We establish a BUY recommendation for Alba at a target price of BHD 1.072 per share, a
72.85% from the current market price of 620 fils as of 16th January 2018 (Table 5). DCF is
given highest weighting as it fully incorporates the impact of line 6 expansion. Relative
valuation has 40% since it highly reflects market perception of the stock using multiples.
Ben Graham formula is given 10% as this method yields a value in the upper bound level.
INVESTMENT ARGUMENT Strong financial position
Despite the line 6 loan and interest burden, the ROA (Appendix 5) has continued to rise indicating strong financial health. With the expectation of increased revenues and production, the profit margin increases to 11% by 2021 from 5% in 2016. The current ratio of Alba remains above 1 consistently showing its ability to pay-off any current liability obligations with its current assets. This is further supported by the 96.8% increase in cash and cash equivalent over 5 years from 2016 to 2020, which is attributed to the line 6 production capacity increase. With boost in revenue due to higher aluminium prices, effective cost reduction through Project Titan, secured contracts for important raw materials, and upgraded production process will help Alba strengthen their financial position.
Company Financial Analysis
Various analysis tools were employed to access the financial standing of the company
(Table 6 & Appendix 9). Firstly, the Piotroski F-score, which is used to determine the value
of stocks through its financial strength, had average scores, representing resilient financial
health. Secondly, the Beneish M-Score which is used to identify any manipulations within
the financial statements; over the 5-year period, no manipulations were found. Lastly, the
Altman Z-score which is used to access the probability of bankruptcy. With being highly-
leveraged for line 6 expansion it is vital to access the likelihood of bankruptcy. However,
with above average scores of 3, bankruptcy is highly unlikely.
Line 6 Project
Alba’s Line 6 project is the major driver in their forecasted valuation. With the expansion
initiative of Line 6 and Power Station 5, it would make Alba the world’s largest single-site
aluminium smelter as well as provide the largest and most efficient power station.
Collectively, it would improve Bahrain’s economic outlook by increasing aluminium
sector’s GDP contribution from 12% to 15% and generate 500 jobs. Based on DCF
valuation, line 6 is estimated to add 374 fils/share to the share price (Table 7).
Table 4 GCC Aluminium Production 2016 (mtpa) Source: Aluminium Insider
Emirates Global Aluminium, UAE 2,471,000 Aluminium Bahrain, Bahrain 971,420 Ma’aden Aluminium, Saudi Arabia 756,800 Qatalum, Qatar 643,500 Sohar Aluminium, Oman 386,396
Table 5 Target Price Source: Team Estimates
Target Price
Weight Weighted
Price DCF Valuation
1.496 50% 0.748
Relative Valuation
0.649 40% 0.260
Ben Graham
0.643 10% 0.064
1-Year Forward Target Price BHD 1.072
Current Market Price (16th Jan 2018) BHD 0.620
Target Price Upside 72.85%
Table 6 Financial Analysis Source: Team Estimates
Financial Analysis (2016)
Piotroski F-Score 5
Beniesh M-Score -3.45
Altman Z-Score 3.181
Table 7 Project Line 6 Appendix 16
Line 6 Details
CAPEX USD$ 3 billion
Project Funding Syndicated Loan $1.5bn
Assuming 2nd loan of $1.2bn Equity financing of $300mn
Output Adding 540,000 mtpa
Line 6 Valuation Target Price
BHD 0.374 per share
Line 6 NPV BHD 530,832,000
012345
Monopoly
Value-addedproducts
Domesticnatural
resources
Human capital& gov support
Strategiclocation
Regionalcompetition
Figure 13 Alba's Competitive Positioning (5-strong & 0-weak) Source: Team Estimates
Project Titan successful implementation
Project Titan commenced in February 2014 as a two-year efficiency program to decrease
cash cost. Project Titan’s target was to save $150/mt; Alba managed saving $148/mt by
2015. Followed by Project Titan II, with the aim of saving $100/mt by end-2017, Alba
managed saving $78/mt in 2016 and $65/mt in 2017 (actual savings were low in 2017 due
to line 5 recovery time). Project Titan will help Alba maintain sustainable growth, boosting
the economies of scale benefit while lowering its costs. We assume the continuation of
this program to reduce costs every year to maintain optimal efficiency and competitive
advantage especially with rising raw material prices.
Positive LME Aluminium Price Outlook
The average LME prices are listed in Table 8. After falling prices between 2015-16, LME
aluminium prices is seen to rise by 20% in 2017 at $1,929 from $1,604 in 2016. The
forecasted market deficit and higher LME prices in 2018 will support Alba’s growth in sales
volume and revenue. In 2019, Alba’s rise in production from Line 6 project will lead to
higher revenue and income. The upward trend will continue in 2020-21. Demand by
transportation, electrical/machinery and construction sectors for aluminium is expected
to increase at 4.9%, 4.2% and 2.1% CAGR respectively. Correspondingly, LME aluminium
U.S. premium that stood at $180/mt on January 2017, was $200/mt by year-end-2017.
This is expected to reach $250/mt with changing industry dynamics.
VALUATION
DISCOUNTED CASH FLOW VALUATION (DCF) Based on DCF, the 1-year forward target price achieved was of BHD 1.496, which is 141%
above current market price of 0.620 fils (Appendix 6).
Free Cash Flows to Firm (FCFF)
To determine the fair equity value of Alba, the formula for Free-Cash-Flow-to-Firm (FCFF)
was used (Cash flow from Operating Activities – Capital Expenditure – Changes in Net
Working Capital). FCFF was selected because Alba uses a combination of equity and debt
to finance their expansion plans and debt plays a major role in the company’s financials
and the cashflow reflects all the major changes undergoing Alba.
Weighted Average Cost of Capital (WACC)
WACC was used to determine the cost of capital at which to discount the FCFF. For the
component of cost of equity, Capital Asset Pricing Model (CAPM) was used with the risk-
free rate of Bahraini Government 10-year Bond. The risk adjusted beta was derived by
calculating it over a 2-year weekly average by comparing Alba’s stock prices to Bahrain
All Share Index. The market return was calculated over a 5-year period by averaging the
daily returns and compounding it annually. For the cost of debt, LIBOR rate of 3.25%+1%
was used due to the syndicated loan secured for line 6 expansion project. Weightings
were derived using historical 5-year average of debt-to-equity ratio (Appendix 6.2).
Terminal Growth Value
Alba contributes 12% to the GDP as of 2016 and is expected to increase to 15% after line
6. This indicates Alba’s important contribution to the GDP; thus, it is used as a mechanism
to determine the terminal growth rate for the terminal value. Conducting a sensitivity
analysis available in Appendix 6.3, the growth rate was 2.25%.
RELATIVE VALUATION To determine the financial worth of Alba, it is compared to 7 other similar companies in
the industry who are Alba’s competitors (Appendix 7). Using earnings multiples of P/E and
EV/EBITDA, we derived a blended target price (40:60) of 649 fils. These multiples were
specifically selected since P/E ratio is a highly common ratio used to measure performance
against competitors and EBITDA excludes non-cash items giving a more approximate
value. The median value was used as it is a better measure of central tendency since it
eliminates the outliers distorting the result.
BEN GRAHAM VALUATION With use of a formula created by Benjamin Graham, we were able to calculate the intrinsic
value of Alba at 643 fils which is our target price for 1-year forward. Appendix 8 outlines
the variables used to calculate the target price. It is understood that Alba’s share price is
undervalued in the market; while its fair value is 3.71% above market price.
ANALYSIS
REVENUE & PRODUCTION CAPACITY Alba is expected to recover from falling revenues (13% decrease) caused by downward
trend in LME aluminium prices, $1,665 and $1,604 in 2015 and 2016 respectively, despite
increasing production. The forecasted revenue is based on production levels and LME
aluminium forecast prices. The production is expected to increase by 4%-5% based on
Table 8 Valuation Variables (in BHD) Source: Team Estimates
Cost of Equity
Risk-free rate 5.50%
Alba's Adjusted Beta 0.94
Market Return 10.68%
Cost of Equity 10.37%
Cost of Debt
4.25%
WACC
8.96%
Relative Valuation
Alba EPS 0.024
Industry P/E 17.79
Target Price 0.427
Alba EBITDA 157,871,000
Industry EV/EBITDA 9.71
Alba Enterprise Value 1,509,246,760
Less: Debt Value 749,498,000
Add: Cash 371,806,000
Equity Value 1,131,554,760
Outstanding Shares 1,420,000,000
Target Price 0.797
W of EPS 40%
W of EV/EBITDA 60%
Blended Target Price 0.649
Table 9 Aluminium Price Sensitivity Analysis ($/mt) Source: World Bank & Team Estimates
Year 2017 2018 2019 2020 2021
Worst 1873 1890 1908 1926 1944
Base 1911 1929 1947 1965 1984
Best 1950 1968 1987 2005 2024
Aluminium Price
1929 1946 1965 1983 2002
Figure 14 Forecasted Revenue (BHD'000) and Aluminium prices (USD$/mt)
Source: Team Estimates
784,886
919,801
1,077,907
1,263,190
1,480,322
1929
1946
1965
1983
2002
1880
1900
1920
1940
1960
1980
2000
2020
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2017 2018 2019 2020 2021
Sales Revenue Aluminium Price
aluminium demand growth, more prominently from American and Asian regions.
Additionally, the continuous increase in LME aluminium prices also contributes to the rise
in Alba’s revenues with the forecasted LME prices between 2017-2021 to be at $1,929 in
2017; reaching $2,002 in 2021. This is due to the expected reforms in reducing China’s
production; thus, decreasing global aluminium supply. Collectively, Alba’s revenue is
expected to exceed BHD1 billion as Line 6 commences in 2019, a 37% increase from 2017
(Figure 14).
COST OF SALES Currently, Alba is under a long-term contract with Alcoa for raw material supply (alumina)
as a legal settlement since 2012. However, terms of the contract have not been disclosed;
thus, we assume continuation of contract for raw materials supply. Furthermore, with the
secured contract for gas prices with NOGA until April 2021, gas prices will become a major
concern by then as it can cause a $31 million fall in net income. However, it is highly
believed another contract for gas prices will be secured by then to prevent Alba from
incurring a loss considering the majority of the company is owned by the government.
Additionally, the government would take necessary measures to strengthen Alba since it
is one of the major contributor to Bahrain's GDP (12%) and would serve in the best interest
of the country. Crude oil price ($/mmbtu), which produces green coke, is expected to
minimally increase over the next 5 years. Moreover, carbon, which is used to produce
carbon anodes for aluminium production is forecasted to increase 5.5% (5-year-CAGR).
With the assumption of further implementation of Project Titan every year to successfully
reduce costs, cost of sales consistently reduces except for the last 2 years where the
increasing prices of alumina (Figure 15) and gas price to more than USD$4/mmbtu
(increasing by USD$0.25/mmbtu yearly) after April 2021 will apply pressure on costs. Thus,
Alba has a competitive advantage in more than half the components of production.
DIVIDENDS The dividend per share was calculated on the basis of compounded annual growth rate
(CAGR) of -4.68%. Alba makes yearly payment of dividends but the dividend payout ratio
and dividend per share are moving in a downward trend (Figure 16). Alba is expected to
distribute dividends in 2017 with a pay-out ratio of 80.99% compared to 16.03% in 2016;
this is due to pick up in LME prices. Despite improved aluminium prices in the future,
Alba’s 10% self-financing plan for line 6 (USD$300 million) and higher capex (45% of line
6 cost) will result in no dividend paid for 2018. The ratio will increase in 2019 to be 40.82%
due to an expected higher income following the operation of Line 6 and lower capex
(25%). The pay-out ratio will decrease YoY in 2020 and 2021 to be 25.59% and 16.92% as
Alba will still be constrained by its Line 6 debt repayment and finance cost obligations.
CASH FLOW GENERATION Alba is expected to yield favorable liquidity measurements, with current ratio exceeding
1.5, indicating the ability to settle current debt obligations using current assets, especially
in 2017 recording the highest ratio (3.83) due to increase in cash (Figure 17). However,
2019 poses to be a difficult year for Alba considering its increased debt obligations and
capex. With signs of recovery up till 2021, the company has a resistant liquidity standing
and has an upward trend overall. The cash ratio in 2017 will be the highest (2.06) given
procurement of line 6 loan, and Project Titan-Phase II that will decrease cash-cost by US$
100 per metric ton. Considering 2020 & 2021, the cash ratio will be low yet improved on
a YoY basis (0.10 and 0.45) due to benefits of Line 6 expansion.
CREDIT PROFILE Syndicated term-loan from both conventional and Shari’aa compliant facilities was
acquired successfully mid-2017 worth $1.5billion (Appendix 16 for further loan details).
Interest Margin is 325 basis point per annum over LIBOR for 7-year period, with a grace
period of 3 years for line 6 construction. The coverage ratio which indicates Alba’s ability
to pay-off its financial obligations, a ratio of over 3 depicts strong financial health. As seen
in figure 18, through the years, the ratio remains above 3 with a gradual increase as the
burden of capex eases.
DUPONT ANALYSIS Return on Equity (ROE) is used as a measurement of Alba’s performance over the years.
Considering the 3 factors of ROE (Figure 19), historically, Alba’s ROE is decreasing over
the years persistently with the most prominent between 2015-16 due to increasing
financial leverage and falling net profit margin. However, the ROE is expected to follow an
upward trend from 2018 onwards as profits from increased sales will increase the profit
margin (as a result of rising production and increase in LME prices), efficient asset turnover
and the major influx of cashflows increasing the equity multiplier reflecting the significant
contribution of the Line 6 project. Therefore, Alba is expected to achieve an ROE of 13%
in 2021, the highest peak in past 5 years.
Figure 17 Coverage Ratio Source: Team Estimates
16.95
17.99
27.03
22.97
22.26
3.973.43
5.15
7.81
12.33
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
0.000
0.005
0.010
0.015
0.020
0.025
0.030
0.035
0.040
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
Dividend Payout Dividend per share
Figure 16 Dividend per share and Pay-out ratio Source: Team Estimates
Figure 15 US$ Nominal Annual Average Price of Raw Materials Source: Consensus Economic Inc & World Bank
286.7
275
280.8
289.4
302
13.7 13.7 14.5 14.5 15.3
5356
59 60 60.9
0
10
20
30
40
50
60
70
260
265
270
275
280
285
290
295
300
305
2017 2018 2019 2020 2021
Alumina Carbon Crude Oil
KEY RISKS
MARKET RISK LME Aluminium Prices (R1)
Alba’s commodity prices are exposed to changes in LME prices (quoted from the London
Metal Exchange) which are used as a basis to determine aluminium prices. Any negative
movements in LME prices would risk the profitability of the firm. However, as seen in figure
20, in the case where LME aluminium prices are to drop by 20%, the impact on the 1-year
forward target price is still a 52.9% upside from the current market price of 620 fils as of
16th January 2018. To manage this risk, futures commodity prices are considered to hedge
selling price as per customers’ options. This approach can prove to be profitable if a
proper strategy is adopted. However, Alba has been able to perform excellently despite
low aluminium periods over the last few years indicating towards Alba’s resilience during
industry downturn.
Gas Prices (R2)
Generally, electricity accounts for 70% in cost variability of aluminium production and
since 2015, the rising gas prices from $2.25 per million British thermal units (MMBTU) can
be a disadvantage for Alba. The yearly increase of $0.25 in price could cost Alba
approximately $31 million. Alba consumes 3,574MW in energy for production while the
rest of Bahrain consumes 3,817MW. This depicts the high level of energy consumption
and dependency on gas for production. On April 2017, when Alba faced a power outage
for 3 hours, they lost 3-5% of production. Following high dependence on gas, Alba
secured a fixed gas price formula, effective till 1st April 2021. Furthermore, to offset
fluctuating aluminium price risks, Project Titan, an in-house initiative, was introduced to
reduce cash cost per unit. Currently, Alba aims to save $100 per unit on a production
1,000,000 mtpa for 2017. We assume the continuation of this project as it helps Alba
maintain its competitive advantage in the market.
FINANCIAL RISK Interest rate risk (R3)
The company is exposed to interest rate risk which would affect its holding assets and
liabilities interest. Currently, the USD$1.5 billion syndicated loan for Line 6 is based upon
LIBOR + 3.25%. Therefore, Alba is subjected to high market risk since LIBOR experiences
daily movements thus it will have a high impact on the profitability and cashflows of Alba.
Foreign exchange risk (R4)
The operating activities is the main segment exposed to changes in foreign exchange
rates. The majority of Alba’s financial instruments are denominated in Bahraini Dinars, US
Dollars, Euros, Swiss Francs and Great Britain Pounds. In the past, the company entered
into forward foreign exchange contracts to hedge against forward foreign exchange
contracts. Alba is not considered to have a significant exposure to US Dollar fluctuations
as the Bahraini Dinar is pegged to the US Dollar at BHD 0.376. With this, the impact and
probability are relatively moderate.
Credit risk (R5)
Credit risk is applicable to Alba’s operating activities (primarily on trade receivables,
financing activities including bank and financial institutions deposits), foreign exchange
transactions and derivatives instruments. A method in which the company reduces credit
risk is to deal with its investments dealt with reputable banks and assign credit limits to
each counterparty. For trade and other receivables, 52% of its outstanding trade
receivables consist of the company’s five largest customers account. In order to manage
the credit risk, Alba prefers receiving advanced payments from customers, assess
creditworthiness by obtaining letters of credit and other forms of credit insurance and
track the customer exposure on a regular basis. When risks of default are identified,
provision for doubtful receivables are created. With the assumption of no derivative
contracts in the future, Alba is not subjected to credit risk for derivatives specifically.
Liquidity risk (R6)
The company may be exposed to this risk when it is unable to sell its financial asset close
to or equal to its fair value. This risk can be decreased by ensuring the availability of
banking facilities. Additionally, Alba includes a sales term where it requires a payment to
be made within 30 to 180 days of the date of sale. However, with a negative cashflow for
2019, liquidity risk remains high for the year. In the long-run this outlook is expected to
change as Alba repays the line 6 loans and operates and maximum capacity to generate
greater profits and cash flow in the future.
0.210.29
0.38
0.58
0.37
2.06
1.17
-0.14
0.10
0.45
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
Figure 18 Cash Ratio Source: Team Estimates
Figure 19 Return on Equity Source: Team Estimates
12%
9%
11%
6%
5%
3%4%
7%
10%
13%
0%
2%
4%
6%
8%
10%
12%
14%
0%
50%
100%
150%
200%
250%
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
Net Profit Margin Asset Turnover Ratio
Equity Multiplier Return on Equity
0.9481.008 1.039
1.105 1.1391.210
-20% -10% -5% 5% 10% 20%
Figure 20 Change in LME Aluminium Price impact on Alba's 1-year forward target price Source: Team Estimates
OPERATIONAL RISK Raw Materials Risk (R7)
Alba is dependent on its suppliers for raw material supply. Any disruptions in the supply
chain could lead to major drawback in the production process. Alba is currently under
contract with Alcoa for raw material supply, and the government for gas supply. In the
case these contracts no longer exist or are not renewed, Alba will be subject to major
fluctuations in market price of raw materials as alumina is expected to become expensive.
As contingency, Alba is assessing options to satisfy the demand for alumina which will rise
to 2.5M metric tons/year once Line 6 begins. Alba’s CEO also announced the consideration
of joint ventures with large alumina suppliers or off-take contracts with their refineries.
Operational Cost Risk (R8)
By means of Project Titan II, Alba has been able to successfully reduce operational costs
over the last 3 years which given them a competitive advantage in the market by selling
at low prices. In addition, Alba close 2016 without any lost time injury. Constant initiative
by the CEO has increasing operational efficiency significantly.
Strategic risk (R9)
Alba manages its strategic risks by adjusting its capital structure and taking appropriate
actions in response to economic changes. This can be done by adjusting dividend
payment to shareholders, return capital and issue new shares. The main objective of
capital management is to sustain a healthy and sufficient capital base able to support its
operations and maximize shareholders’ value. Since Alba is constantly on top of such
factors to ensure smooth flow of operations, the risk is minimal. Historically, Alba has had
many successful strategies (Project Titan I & II).
ECONOMIC RISK Bahrain Macroeconomic Status Quo (R10)
The economic slowdown of Bahrain since the financial crisis 2007/8, Arab Spring 2011 and
declining oil prices has been gradually recovering (Figure 21). The non-oil sector (of which
Alba is a part of) has remained resilient despite fiscal reforms such as VAT (5%) and subsidy
removal. The introduction of 5% Value Added Tax on all sales by Q3 in 2018 might affect
Alba's semi-final aluminium production indirectly, as there is the likelihood of VAT being
applied to the downstream industry products. This will eventually affect Alba’s revenue as
41% is derived locally.
Sovereign Credit Downgrade (R11)
Bahrain’s credit rating is at a risk of another downgrade from B+. It was recently
downgraded from BB- to B+ by S&P due to lack of fiscal reform plans and budgeting
reports. However, with current reforms under process, the risk of downgrade is moderate
since Alba already secured the syndicated loan for line 6 expansion.
STOCK ANALYSIS
2015 Q3 - NOGA announced a 25% increase to oil and gas prices. This took an effect on April 1st. Increase in oil and natural gas prices
caused a panic among public shareholder within the Bahraini Index. ALBH started dropping starting Q3.
2016 Q2 - ALBH reached its lowest point due to LME price decline, owing to the major increase in supply. The oversupply affected the
global markets negatively. China started supplying the market with aluminum at lower price than the current market.
2017 Q1 - ALBH started to recover from the LME prices decline after adjusting to market fluctuations. LME started to resume its normal
prices after China’s proposed 30% cut of production capacity.
2018 Q1 - Line 6 is one of the major drivers of share price increase; as the project nears its completion date, the future prospect for Alba
is moving in a positive direction. Additionally, China production curtailment and expectation of higher LME prices has led to the increase.
8.30%
6.20%
2.50%
4.30%
2.10%
3.60%
5.30%
4.40%
2.90%3%
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Figure 21 Bahrain Real GDP Growth Rate Source: World Bank
Figure 22 Risk Grid Source: Team Estimates
0
5000000
10000000
15000000
20000000
25000000
BHD 0.100
BHD 0.200
BHD 0.300
BHD 0.400
BHD 0.500
BHD 0.600
BHD 0.700
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2014 2015 2016 2017 2018
Volume Average PriceFigure 23 Stock Valuation
APPENDICES
APPENDIX 1: CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F
BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000
Sales 743,725 749,338 821,715 766,686 669,760 784,886 919,801 1,077,907 1,263,190 1,480,322
Cost of sales -638,515 -640,751 -673,947 -663,428 -587,381 -671,253 -777,438 -900,294 -1,042,415 -1,206,793
GROSS PROFIT 105,210 108,587 147,768 103,258 82,379 113,633 142,363 177,614 220,776 273,528
Other income 39,378 7,304 1,865 3,701 2,989 1,750 1,772 2,695 2,817 2,946
(Loss) gain on foreign exchange translation -17,838 211 671 728 -19 - - - - -
Administrative expenses -27,347 -30,609 -29,546 -32,417 -22,548 -28,263 -33,121 -38,815 -45,487 -53,305
Selling and distribution expenses -1,346 -17,574 -19,885 -12,187 -11,259 -12,254 -14,360 -16,828 -19,721 -23,111
Finance costs -7,182 -5,823 -4,449 -3,176 -2,504 -40,391 -61,200 -52,548 -43,936 -35,157
Directors’ fees -190 -190 -190 -210 -210 -210 -210 -210 -210 -210
Net revaluation/settlement of derivatives 5,860 17,871 211 264 - - - - - -
PROFIT FOR THE YEAR BEFORE TAX 96,545 79,777 96,445 59,961 48,828 34,265 35,244 71,907 114,240 164,691
Tax expense - - - - -438 - - - - -
PROFIT FOR THE YEAR 96,545 79,777 96,445 59,961 48,390 34,265 35,244 71,907 114,240 164,691
ASSUMPTIONS: Sales Revenue: expected to increase with the boost in production due to line 6. Increasing worldwide demand for aluminium is another reason for the increase.
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Yearly Production 890,217 912,700 931,427 960,643 971,420 981,016 1,019,668 1,540,000 1,609,993 1,698,543
LME Aluminium Price: Based on World Bank forecasts, the team conducted a sensitivity analysis to produce realistic figures of the forecasted aluminium prices.
2017 2018 2019 2020 2021 Probability The rising LME prices will encourage Chinese producers to increase aluminium output, posing downside
risk on LME prices. Still, the LME prices will rise due to weakening US dollar against other basket of
currencies, despite Federal Reserve interest rate hawkish hike from 1% to 1.25% this year (2017).
Moreover, the local premiums react to US Midwest premiums; and there is an impression that the US
Midwest premium is increasing for P1020 aluminium, given the need for aluminium imports into US.
Increase in freight rates will add to the premium prices; premiums will cushion aluminium smelters to
some extent from fall in price. Furthermore, rising raw material costs will further drive the prices
upwards. Incorporating all these factors, with the optimistic outlook in the aluminium market, the best-
case scenario has a higher probability of occurrence than the base and worse.
World Bank Forecasts 1950 1968 1987 2005 2024
Worst-case 1873 1890 1908 1926 1944 0.15
Base 1911 1929 1947 1965 1984 0.25
Best-case 1950 1968 1987 2005 2024 0.60
Team Estimates (in $/mt) 1929 1946 1965 1983 2002
Cost of Sales: With successful implementation of Project Titan Phase I & II, COS expected to decrease despite increase in Alumina prices due to Alba-Alcoa long-term contract
Expenses: As the size of Alba increases with its production, its expenses are expected to increase as well as it caters to more orders around the globe.
Finance Cost: With the line 6 loan of USD$1.5 billion and USD$1.2 billion at 3.25% LIBOR rate, the interest rate is calculated accordingly.
APPENDIX 2: CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in BHD ‘000) 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F
Assets
Non-current assets
Property, plant and equipment 901,779 868,318 837,757 811,377 847,500 1,102,685 1,513,794 1,679,390 1,582,116 1,482,947
Long term receivable 10,314 6,877 3,439 - - - - - - -
Other asset - - 4,704 4,512 4,320 - - - - -
Deferred tax asset - - - - 10 - - - - -
912,093 875,195 845,900 815,889 851,830 1,102,685 1,513,794 1,679,390 1,582,116 1,482,947
Current assets
Inventories 143,564 144,930 152,469 146,404 163,422 157,823 164,042 247,751 259,012 273,257
Current of long terms receivables 3,438 3,438 3,438 - - - - - - -
Long term receivable - - - 3,439 - 60,763 1,743
Trade and other receivables 108,299 85,375 92,888 100,698 92,065 100,684 117,991 138,273 162,041 189,894
Other assets - 4,800 - - - - - - - -
Derivatives financial instrument 104 - - - - - - - - -
Bank balances and cash 61,605 64,540 67,198 116,009 66,413 371,806 294,027 -30,814 24,500 130,726
317,010 303,083 315,993 366,550 321,900 691,077 576,059 356,953 445,552 593,877
TOTAL ASSETS 1,229,103 1,178,278 1,161,893 1,182,439 1,173,730 1,793,762 2,089,853 2,036,343 2,027,668 2,076,825
Equity and Liabilities
Equity
Share capital 142,000 142,000 142,000 142,000 142,000 142,000 142,000 142,000 142,000 142,000
Treasury shares -4,087 -5,157 -3,696 -4,905 -4,965 -4,965 -4,965 -4,965 -4,965 -4,965
Statutory reserve 71,000 71,000 71,000 71,000 71,000 71,000 71,000 71,000 71,000 71,000
Capital reserve 249 249 249 249 249 249 249 249 249 249
Retained earnings 600,683 629,381 687,387 731,698 779,813 806,322 755,508 827,415 910,982 1,046,437
Proposed dividend 19,773 30,978 21,200 7,768 - 29,658 - 30,673 29,237 27,868
TOTAL EQUITY 829,618 868,451 918,140 947,810 988,097 1,044,264 963,792 1,066,372 1,148,503 1,282,589
Non-current liabilities
Borrowings 77,096 84,402 64,137 33,024 6,489 567,578 872,133 750,495 627,283 502,291
Employees’ end of service benefits 915 930 1,265 1,349 1,554 1,678 1,916 2,056 2,275 2,418
Derivatives financial instruments 23,996 5,313 - - - - - - - -
102,007 90,645 65,402 34,373 8,043 569,256 874,048 752,550 629,558 504,709
Current liabilities
Borrowings 160,303 116,432 72,351 56,373 45,235 34,286 23,654 16,976 12,562 9,507
Trade and other payables 106,585 97,960 101,378 143,844 132,355 145,955 171,044 200,445 234,899 275,277
Derivative financial instruments 13,430 4,790 4,622 39 - - - - - -
Short term loans 17,160 - - - - - 57,315 - 2,145 4,744
297,478 219,182 178,351 200,256 177,590 180,242 252,013 217,421 249,607 289,527
TOTAL LIABILITIES 399,485 309,827 243,753 234,629 185,633 749,498 1,126,061 969,971 879,165 794,236
TOTAL EQUITY AND LIABILITIES 1,229,103 1,178,278 1,161,893 1,182,439 1,173,730 1,793,762 2,089,853 2,036,343 2,027,668 2,076,825
APPENDIX 3: CONSOLIDATED CASHFLOW STATEMENT
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000
OPERATING ACTIVITIES
PROFIT FOR THE YEAR 96,545 79,777 96,445 59,961 48,828 34,265 35,244 71,907 114,240 164,691
Adjustments for:
Depreciation 77,573 77,831 79,419 73,775 71,380 83,215 96,491 116,404 127,467 128,651
Amortisation of other asset - - 96 192 192 - - - - -
Provision for employees’ end of service benefits 814 844 1,403 1,476 1,521 1,401 1,610 1,662 1,695 1,729
Provision for impairment of inventories - 339 252 177 53 214 217 330 345 361
Provision for impairment of receivables - net - -51 -4 197 -197 -150 -184 -218 -252 -286
Gain on revaluation of derivative financial instruments -27,648 -27,219 -5,481 -4,583 - - - - - -
Loss on disposal of property, plant and equipment 36 -1,391 1,549 1,114 239 - - - - -
Write off of property, plant and equipment (NBV) 16 124 - - - - - - - -
Write off of impairment provision of inventories - -62 -179 - - - - - - -
Interest income -389 -249 -188 -142 -171 -861 -1125 -1530 -2346 -3325
Finance costs 6,121 4,759 3,733 2,749 2,306 40,391 61,200 52,548 43,936 35,157
Cost of Employees’ Stock Incentive Plan - net 765 680 -92 - - - - - - -
153,833 135,382 176,953 134,916 124,151 158,475 193,452 241,103 285,084 326,977
WORKING CAPITAL CHANGES:
Inventories 14,456 -1,643 -7,612 5,888 -17,071 5,599 -6,218 -83,710 -11,260 -14,246
Accounts receivable and prepayments -25,014 5,815 -7,509 -8,007 8,820 -8,619 -17,307 -20,282 -23,768 -27,853
Accounts payable and accruals 6,547 -8,553 3,608 42,586 -11,820 13,600 25,088 29,401 34,455 40,377
CASH FROM OPERATIONS 149,822 131,001 165,440 175,383 104,080 169,055 195,016 166,513 284,511 325,256
Employees’ end of service benefits paid -839 -829 -1,068 -1,392 -1,316 -2,804 -3,850 -4,116 -4,183 -4,200
Income tax paid - - - - -217 - - - - -
Net cash flows from operating activities 148,983 130,172 164,372 173,991 102,547 166,250 191,166 162,397 280,328 321,055
INVESTING ACTIVITIES
Purchase of property, plant and equipment -32,724 -57,512 -50,550 -48,575 -108,122 -338,400 -507,600 -282,000 -31,193 -31,482
Proceeds from disposal of property, plant & equipment 127 14,409 143 66 380 - - - - -
Other asset - -4,800 - - - - - - - -
Interest received 389 249 188 142 171 2436 2542 2755 3271 3852
Net cash flows used in investing activities -32,208 -47,654 -50,219 -48,367 -107,571 -335,964 -505,058 -279,245 -27,921 -27,631
FINANCING ACTIVITIES
Repayment of long term receivable 3,439 3,437 3,438 3,438 3,439 3,243 3,390 3,544 3,705 3,874
Borrowings availed 204,920 314,655 231,240 103,400 105,280 564,000 440,400 - - -
Borrowings repaid -284,394 -351,220 -295,586 -150,491 -142,953 -22,087 -146,477 -128,316 -127,625 -128,047
Movement in short term loans 4,076 - - - - - - - - -
Finance costs paid -6,213 -4,831 -3,923 -2,869 -2,235 -40,391 -61,200 -52,548 -43,936 -35,157
Dividends paid -76,271 -39,488 -47,998 -28,963 -7,756 -29,658 0 -30,673 -29,237 -27,868
Purchase of treasury shares -805 -2,652 -2,020 -1,933 -818 - - - - -
Proceeds from resale of treasury shares 591 516 3,354 605 471 - - - - -
Net cash flows used in financing activities -154,657 -79,583 -111,495 -76,813 -44,572 475,107 236,112 -207,993 -197,093 -187,198
Decrease/Increase in Cash & Cash Equivalents -37,882 2,935 2,658 48,811 -49,596 305,393 -77,780 -324,841 55,314 106,227
Cash and cash equivalents at 1 January 99,487 61,605 64,540 67,198 116,009 66,413 371,806 294,027 -30,814 24,500
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 61,605 64,540 67,198 116,009 66,413 371,806 294,027 -30,814 24,500 130,726
APPENDIX 4: CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in BHD ‘000) Share Capital
Treasury Shares
Statutory Reserves
Capital Reserve
Retained Earnings
Proposed Dividend
Total
Balance at 31 December 2012 142,000 -4,087 71,000 249 600,683 19,773 829,618 Total comprehensive income for the year 79,777 79,777 Net movement in treasury shares -1,750 -1,750 Amortization of cost of treasury shares held for Employees’ Stock Incentive Plan 680 680 Loss on resale of treasury shares -386 -386 Final dividend for 2012 approved and paid -19,759 -19,759 Excess of final dividend for 2012 reversed 14 -14
Interim dividend for 2013 proposed and paid -19,729 -19,729 Proposed final dividend for 2013 -30,978 30,978
Balance at 31 December 2013 142,000 -5,157 71,000 249 629,381 30,978 868,451 Total comprehensive income for the year 96,445 96,445 Net movement in treasury shares 1,553 1,553 Reversal of amortization of treasury shares held for Employees’ Stock Incentive Plan -92 -92 Loss on resale of treasury shares -219 -219 Final dividend for 2013 approved and paid -31,040 -31,040 Shortage of final dividend for 2013 added -62 62
Interim dividend for 2014 proposed and paid -16,958 -16,958 Proposed final dividend for 2014 -21,200 21,200
Balance at 31 December 2014 142,000 -3,696 71,000 249 687,387 21,200 918,140 Total comprehensive income for the year - - - - 59,961 - 59,961 Net movement in treasury shares - -1,209 - - - - -1,209 Loss on resale of treasury shares -119 -119 Final dividend for 2014 approved and paid -21,198 -21,198 Excess of final dividend for 2014 reversed 2 -2
Interim dividend for 2015 paid -7,765 -7,765 Proposed final dividend for 2015 -7,768 7,768
Balance at 31 December 2015 142,000 -4,905 71,000 249 731,698 7,768 947,810 Total comprehensive income for the year 48,390 48,390 Net movement in treasury shares -60 -60 Loss on resale of treasury shares -287 -287 Final dividend for 2015 approved and paid -7,756 -7,756 Excess of final dividend for 2015 reversed 12 -12
Balance at 31 December 2016 142,000 -4,965 71,000 249 779,813 - 988,097
APPENDIX 5: FINANCIAL RATIOS
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F
Liquidity Ratios:
Current Ratio 1.07 1.38 1.77 1.83 1.81 3.83 2.29 1.64 1.79 2.05
Quick Ratio 0.58 0.72 0.92 1.10 0.89 2.96 1.63 0.50 0.75 1.11
Average Collection Period 53 42 41 48 50 47 47 47 47 47
Days Inventory Held 82 83 83 81 102 86 77 100 91 83
Days Payable Outstanding 61 56 55 79 82 79 80 81 82 83
Cash Ratio 0.21 0.29 0.38 0.58 0.37 2.06 1.17 -0.14 0.10 0.45
Cash Conversion Cycle 74 68 69 49 69 53 44 66 55 46
Activity Ratios:
Account Receivable Turnover 6.87 8.78 8.85 7.61 7.27 7.80 7.80 7.80 7.80 7.80
Inventory Turnover 4.45 4.42 4.42 4.53 3.59 4.25 4.74 3.63 4.02 4.42
Payable Turnover 5.99 6.54 6.65 4.61 4.44 4.60 4.55 4.49 4.44 4.38
Fixed Asset Turnover 0.82 0.86 0.98 0.94 0.79 0.71 0.61 0.64 0.80 1.00
Total Asset Turnover 0.61 0.64 0.71 0.65 0.57 0.44 0.44 0.53 0.62 0.71
Leverage Ratios:
Debt Ratio 0.33 0.26 0.21 0.20 0.16 0.42 0.54 0.48 0.43 0.38
Long-term Debt to Assets 0.06 0.07 0.06 0.03 0.01 0.32 0.42 0.37 0.31 0.24
Debt to Equity 0.48 0.36 0.27 0.25 0.19 0.72 1.17 0.91 0.77 0.62
Financial Leverage 1.48 1.36 1.27 1.25 1.19 1.72 2.17 1.91 1.77 1.62
Profitability Ratios
Return on Assets 8% 7% 8% 5% 4% 2% 2% 4% 6% 8%
Return on Equity 12% 9% 11% 6% 5% 3% 4% 7% 10% 13%
Gross Profit Margin 14% 14% 18% 13% 12% 14% 15% 16% 17% 18%
Net Profit Margin 13% 11% 12% 8% 7% 4% 4% 7% 9% 11%
Earnings per Share (fils) 68 57 68 42 34 24 25 51 81 117
Dividend Payout 79.00% 49.50% 49.77% 48.30% 16.03% 80.99% 0.00% 40.82% 24.77% 16.48%
APPENDIX 6: DISCOUNTED CASHFLOW VALUATION (DCF)
6.1 DCF CALCULATION
(in BHD ‘000) 2017 2018 2019 2020 2021 TOTAL
Assumptions:
CAPEX was based on division of $3billion of line 6
expansion over 3 years; 30% in 2017, 45% in 2018,
and 25% in 2019, followed by regular CAPEX.
Working Capital Changes derived using changes in
inventory (% of production level), trade receivables
and payables (% of sales).
Cash flow from operating activities 166,250 191,166 162,397 280,328 321,055
(-) CAPEX (338,400) (507,600) (282,000) (31,193) (31,482)
(-) Working Capital Change (10,580) (1,563) 74,590 573 1,722
Free Cash Flow to Firm (FCFF) (182,729) (317,998) (45,013) 249,709 291,295
Terminal Value 4,438,752
Total (182,729) (317,998) (45,013) 249,709 4,730,047
N 1 2 3 4 5
WACC 8.96% 8.96% 8.96% 8.96% 8.96%
Present Value (167,709) (267,866) (34,800) 177,183 3,080,352 2,787,160
Enterprise Value 2,787,160
(+) Cash 130,726
(-) Debt (794,236)
Equity Value 2,123,650
No. of Shares 1,420,000,000
Target Price per Share 1.496
BHD 1.496 Cost of Capital
A sensitivity analysis was conducted on the key
variables used to calculate the DCF target price; cost
of capital and terminal growth rate. Both inputs are
tested under various scenarios to show target prices
with different values.
6.93% 7.68% 8.51% 8.96% 9.40% 10.37% 11.43%
Term
inal
Gro
wth
Rate
1.93% 2.461 1.978 1.574 1.397 1.241 0.965 0.728
2.13% 2.597 2.077 1.647 1.460 1.296 1.006 0.759
2.25% 2.675 2.134 1.689 1.496 1.327 1.029 0.777
2.36% 2.757 2.194 1.732 1.532 1.359 1.053 0.795
2.60% 2.949 2.330 1.831 1.616 1.431 1.107 0.835
6.2 WACC
Beta Calculation
Comparing the 2-year weekly historical data of Alba and Bahrain All Share Index, the covariance
between two assets was 1.23, resulting in a beta of 0.97.
Market Return
This was calculated using 5-year annual average historical data. Averaging 6.83% (2012), 17.20%
(2013), 14.23% (2014), 14.77% (2015), and 0.38% (2016), the market return used for WACC is 10.68%.
2012 2013 2014 2015 2016 Average
Equity Weighting 67.50% 73.71% 79.02% 80.16% 84.18% 76.91%
Debt Weighting 32.50% 26.29% 20.98% 19.84% 15.82% 23.09%
6.3 TERMINAL GROWTH VALUE
Sensitivity Analysis Bahrain Forecasted GDP Growth Rate (%)
Scenario Rate Probability Weighted Rate 2016 2017 2018 2019 2020 2021 2022
Worst 1.71% 0.15 0.26% 2.973 2.48 1.741 1.713 2.129 2.221 2.231
Base 2.20% 0.25 0.55% Considering forecasted growth rate of Bahrain’s GDP, worst, best and base cases were allotted accordingly. Probability of best is highly likely due to line 6 successful implementation and a rate of 2.4% is given due to expectation if increasing aluminium demand and Alba production. Minimum probability allotted for worse-case due to low chances of downturn in aluminium industry as it recovers from low LME price.
Best 2.40% 0.60 1.44%
Terminal Growth Rate 2.25%
APPENDIX 7: RELATIVE VALUATION
Ticker Company Country Market Cap (in BHD millions) P/E EV/T12M EBITDA
AA Alcoa USA 3766.45 17.79 7.74
KALU Kaiser Aluminum Corporation USA 716.4 21.80 9.86
TYO: 5741 UACJ Corp Japan 489.67 8.58 7.83
EPA: RUSAL United Co Rusal PLC Russia 4170 8.36 9.56
NSE: HINDALCO Hindalco Industries LT India 3440 12.04 7.83
CENX Century Aluminium Company USA & Iceland 715.77 62.38 16.20
BCBA: ALUA Aluar Aluminio Argentina 921.2 20.19 11.03
Peer Companies’ Median 17.79 9.56
Aluminium Bahrain Multiples 10.16 7.58
Premium -42.89% -20.71%
Alba EPS 0.024
Industry Median P/E 17.79 Multiples Target Price Weighting Weighted Target Price
Target Price 0.427 EV/EBITDA 0.797 60% 0.478
Alba EBITDA 157,871,000 EPS 0.427 40% 0.171
Industry Median EV/EBITDA 9.56 Blended Target Price 0.649
Alba Enterprise Value 1,509,246,760
Less: Debt Value 749,498,000 Note: EV/EBITDA is given higher weighting because it is a better measure of performance
as it eliminates non-cash items such as depreciation and amortization giving more realistic
value.
Add: Cash 371,806,000
Equity Value 1,131,554,760.00
Outstanding Shares 1,420,000,000 The peer selection criteria were only mid and small cap companies to maintain uniformity
with Alba.
Target Price 0.797
APPENDIX 8: BENJAMIN GRAHAM FORMULA
Ben Graham Formula
The Ben Graham Formula, created by Benjamin
Graham, is used to calculate a growth stock. It
represents the stock’s fundamental value by
considering the EPS and PE ratios.
𝑽 =𝑬𝑷𝑺 × (𝑷𝑬 + 𝟐𝒈) × 𝑹
𝒀
V = Intrinsic Value
EPS = Earnings per share
PE = Price-to-earnings ratio
g = Growth rate
R = Required rate of return
Y = Risk-free rate
Earnings per share 0.024
PE Ratio 10.16
Long-term Growth Rate 2.25%
Required Rate of Return 8.96%
Risk-free rate 5.50%
Value 0.399
Current Market Price (16-Jan-2018) 0.620
Relative Graham Value (RGV) 0.643
Recommendation BUY
APPENDIX 9: STOCK ANALYSIS TOOLS
9.1 PIOTROSKI F-SCORE
This tool is used to determine the value of stocks, if it is a winning or losing stock. Created by Professor Joseph Piotroski, the F-score helps identify the financial strength of a company. There are nine
parameters to this formula under which 3 categories are analysed; profitability (1, 2, 3, 4), capital structure (5, 6, 7) and operating efficiency (8, 9). A score 1 is awarded to a positive movement in the
parameter, and 0 for negative. F-score of 9 being the best; while 0 is worst. A score below 3 is considered weak, 4-6 average and 7-8 best.
No. Parameters Values Score
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
1 Net Income 96,545 79,777 96,445 59,961 48,390 1 1 1 1 1
2 Operating Cash Flow 148,983 130,172 164,372 173,991 102,547 1 1 1 1 1
3 Return on Assets 7.85% 6.77% 8.30% 5.07% 4.16% 0 0 1 0 0
4 Earnings Quality 52,438 50,395 67,927 114,030 54,157 1 1 1 1 1
5 Long-term-Debt-to-Assets Ratio 0.08 0.08 0.06 0.03 0.01 0 0 0 0 0
6 Current Ratio 0.21 0.29 0.38 0.58 0.37 0 1 1 1 0
7 Average Shares Outstanding 1,409,105 1,410,767 1,411,575 1,410,511 1,409,515 1 1 1 0 0
8 Gross Margin 0.14 0.14 0.18 0.13 0.12 0 1 1 0 0
9 Asset Turnover 1.65 1.57 1.41 1.54 1.75 1 0 0 1 1
F-Score 5 4 5 6 5
Totalling the scores, each year is above 3 indicating strong financial health of Alba.
9.2 BENEISH M-SCORE The Beneish M-Score is a stock-selection-tool used to identify any manipulations done to the company’s earnings by the firm itself. These manipulations are usually done to disguise any financial difficulty
by adjusting some numbers within the statements. Using this statistical tool, the shareholders need to be aware of any manipulation as it could affect their dividend payments. If the M-Score is greater
than -2.22, it is highly likely that there was some manipulation done. Developed by Professor Messod Beneish in 1999, the equation used to calculate the 8-variable M-Score model is;
M = -4.84 + 0.92 (DSRI) + 0.528 (GMI) + 0.404 (AQI) + 0.892 (SGI) + 0.115 (DEPI) – 0.172 (SGAI) + 4.679 (TATA) – 0.327 (LVGI)
Year 2012 2013 2014 2015 2016
Parameters
Net Sales 743,725 749,338 821,715 766,686 669,760
Cost of Goods 638,515 640,751 673,947 663,428 587,381
Net Receivables 108,299 85,375 92,888 100,698 92,065
Current Assets 317,010 303,083 315,993 366,550 321,900
Property, Plant and Equipment 901,779 868,318 837,757 811,377 847,500
Depreciation 77,573 77,831 79,419 73,775 71,380
Total Assets 1,229,103 1,178,278 1,161,893 1,182,439 1,173,730
SGA Expense 28,693 48,183 49,431 44,604 33,807
Net Income 96,545 79,777 96,445 59,961 48,828
Cash Flow from Operations 148,983 130,172 164,372 173,991 102,547
Current Liabilities 297,478 219,182 178,351 200,256 177,590
Long-term Debt 102,007 90,645 65,402 34,373 8,043
Other Long-Term Assets 10314 6877 8143 4512 4330
Derived Variables
Days Sales in Receivables Index (DSRI) 0.7824 0.9922 1.1619 1.0466 0.9332
Gross Margin Index (GRI) 1.0244 1.2410 0.7489 0.9133 1.1771
Asset Quality Index (AQI) 0.6955 1.2008 0.5445 0.9668 0.0000
Sales Growth Index (SGI) 1.0075 1.0966 0.9330 0.8736 1.1719
Depreciation Index (DEPI) 1.0385 1.0526 0.9625 0.9320 0.9033
Sales, General and Administrative Expenses Index (SGAI) 1.6667 0.9355 0.9671 0.8676 0.9633
Total Accruals to Total Assets (TATA) -0.0427 -0.0428 -0.0585 -0.0964 -0.0458
Leverage Index (LVGI) 0.8090 0.7978 0.9458 0.7970 2.6385
M-Score -3.03 -2.31 -2.96 -2.98 -3.45
As per the M-Score calculated for Alba, the M-Score are all lower than the benchmarks of -2.22 indicating no manipulation in the reports.
9.3 ALTMAN Z-SCORE
The Zeta score measure how likely a company will go bankrupt in the next two years. If the Z-score is lower than 1.8, then it very likely to bankrupt; where as a score higher than 3.0 is highly unlikely to
go bankrupt. If the score is between 1.8 and 3.0 then it is a grey area. The formula used is;
Z = 1.2A+1.4B+3.3C+0.6D+1.0E
2012 2013 2014 2015 2016
Working Capital 19,532 83,901 137,642 166,294 144,310
Retained Earnings 600,683 629,381 687,387 731,698 779,813
EBIT 103,727 85,600 100,894 63,137 51,332
Market Capitalization 766,451 702,008 695,924 664,178 429,549
Sales 743,725 749,338 821,715 766,686 669,760
Total Assets 1,229,103 1,178,278 1,161,893 1,182,439 1,173,730
Total Current Liabilities 297,478 219,182 178,351 200,256 177,590
A = Working Capital/Total Assets 0.016 0.071 0.118 0.141 0.123
B = Retained Earnings/Total Assets 0.489 0.534 0.592 0.619 0.664
C = EBIT/Total Assets 0.084 0.073 0.087 0.053 0.044
D = Market Capitalization/Total Liabilities 1.919 2.266 2.855 2.831 2.314
E = Sales/Total Assets 0.605 0.636 0.707 0.648 0.571
Z score 2.738 3.068 3.677 3.558 3.181
The average 5-year score is 3.24. Thus, we can assume that in the coming years ALBA is highly unlikely to bankrupt.
APPENDIX 10: SWOT ANALYSIS
STRENGTH
• Monopolized market locally and well established regionally
• Sturdy ownership structure, solid and generous support from the government
• Established strong relationship with customers & suppliers
• Ensures strong financial position since national and international institutions
financed Alba’s line 6 project
• Capitalizes on human assets through training & development, and safe work
environment
• Ensures synergy within management to reach targets
• Generates its own power through a grid and exports water and electricity to EWA
• Supply creates its own demand due to delivery of high-class aluminium with purity
levels of more than 99.86%
• Pioneer in installation of modern technology to raise production & fuel efficiency
(9HA Gas Turbine from GE for Power Station 5)
• Strategic logistical location of the smelter and Port facility in the heart of aluminium
park makes access to key market convenient
• Diversified sources of revenue; primary aluminium products, export of electricity and
water for 225 fils per m3 to Bahraini government
• Favourable sales volumes result and financial position despite falling prices and
significant loans for Line 6 expansion
• Benefit of economies of scale and low operating industrial costs and tackles elevating
costs by new technologies (Project Titan Phase II)
THREAT
• Deficiency of natural gas requires the government to import it, increasing Alba’s
costs
• Shifts in macroeconomic fundamentals that hinder aluminium market
• Appreciation in US Dollar which will weigh on LME prices
• Intense competition and slimmer profits in tandem with start of new projects in
China and ROW, leading to overcapacity of aluminium
• Alba’s projected output in January 2019 could pull LME prices down when
accompanied with competitors output
• Escalation in regional and global geopolitical tensions that hinders Alba’s
aluminium exports
• Introduction of tight fiscal and monetary policy measures, awakening inflation and
Alba costs of production
• Trade Union Law permits workers to strike in non-vital places and Alba is not
regarded as sensitive or vital site, this could hinder Alba’s operations
• Tensions between the management and Alba labour union
WEAKNESSES
• Cost of modernization and maintaining existing machines is expensive
• Revenue is mainly derived from domestic downstream companies
• Dependence on BAPCO for generation of natural gas and diesel that are needed
for the electro cycle process and operation of other machines
• Investments in research and development and other advanced technology, or
tapping into new markets will be difficult due to high costs, given the need to
repay significant loan for Line 6 in 12 months
• The significant loan taken for Line 6 expansion project will make it difficult to invest
in other advanced technologies or tap into new markets given the high costs
OPPORTUNITIES
• Increase production through Line 6 expansion project which will make it the largest
single-site smelter in the world.
• Encourages research and development to catch up with the shifts in customer
demands
• Vertical forward or backward merger or acquisition
• Demand for aluminium proliferate due to its characteristics; mainly recyclable
• Government supportive legislations in setting a favourable and low-cost
environment for attracting aluminium downstream industries
• External expansion
APPENDIX 11: PORTER’S 5 FORCES
THREAT OF SUBSTITUTES
ALUMINIUM SUBSTITUTION
The threat of substitutions could include all metals that can act as alternatives to aluminium. Other
materials/metals that can used as replacement for different purposes are listed below:
a) Aircraft fuselages and wings: Composite materials
b) Packaging: Glass, plastic, paper and steel
c) Ground transportation and structural purposed: Titanium, magnesium and steel
d) Construction purposes: Wood, steel, vinyl and composite material
e) Electrical products: Copper
However, aluminium continues to be a preferable option due it being lightweight, impact-resistant,
corrosion-resistant, and fully-recyclable, withstand various temperatures, an efficient conductor
and allows a variety of processing methods.
SUPPLIER SUBSTITUTE
As of the current national aluminium market, Alba remains to be the sole supplier of aluminium
domestically which accounts for 41% of revenue. Thus, the threat is minimal.
BARGAINING POWER OF SUPPLIERS
SUPPLIER INFLUENCE
The number of suppliers available can determine Alba’s supply. If there are a small number of
suppliers, this indicates that they have more power and vice versa. Supplies for raw materials
are delivered by Alcoa, Hydro, and BHPBilliton.
DEGREE OF COMPETITION
ALUMINIUM INDUSTRY
The presence of multiple aluminium smelters in the world poses a threat to Alba especially with
dominant position of China which consists of several aluminium smelters producing high
overall quantity. Additionally, Alba has competitors existing within the GCC regions with top
aluminium companies located in UAE (Emirates Global Aluminium), Saudi Arabia, KSA (Ma’aden
Aluminium), Oman (Solar Aluminium) and Qatar (Qatalum). Therefore, Alba could attain higher
competitive advantage after the completion of Line 6 expansion.
THREAT OF NEW ENTRY MARKET SHARE Alba has acquired monopoly over the aluminium smelting market in the Kingdom of Bahrain and it also holds a position as one of the most recognizable smelter in the GCC region. Therefore, the company’s strong position in the market and a trusted supplier to its clients would make it difficult for new competitors dominate Alba.
ECONOMIES OF SCALE Potential start-up aluminium smelter would face difficulties in competing with Alba in terms of productivity and efficiency as Alba has been in the smelting business for over 49 years. Therefore, its experience and size within the industry has led to it achieving economies of scale where it is able to produce aluminium in large quantities at a low cost per unit.
ENVIRONMENTAL STANDARD Alba has a strong record of following eco-friendly standards in both local and global standards. The company had spent almost USD589 million in environmental conservation. This gives Alba a competitive edge in the aluminium industry. and challenges potential entrants to increase costs to avoid breaching environmental standards.
TECHNOLOGY DEVELOPMENT Since Alba is currently in the process of building Line 6, it has also upgraded the technology used from EGA DX+ to EGA DX+ Ultra which aims to lower energy consumption while concurrently increasing output. New aluminium smelters in Bahrain would have to match or install more advanced technological update of Alba in order to compete at the same level.
INDUSTRIAL LOCATION For new entrants to enter the smelting industry, the companies would have to match Alba’s extensive plant that is able to produce 971,000 mtpa. Therefore, this would incur research cost to search for a suitable land in a non-residential area and be granted the approval of the government for an industrial producer and manufacturer.
0
1
2
3
4
5DEGREE OF COMPETITION
THREAT OF NEW ENTRANTS
THREAT OF SUBSTITUTESBARGAINING POWER OF
SUPPLIERS
BARGAINING POWER OF CUSTOMERS
0 1 2 3 4 5
No threat Very Low Low Average High Very High
BARGAINING POWER OF CUSTOMERS PRICING INFLUENCE
Alba’s product prices and quality can be influenced by demand and supply of the products. This
is driven by the number of customers and the significance of each customer. If one of Alba’s
client decides to purchase from another supplier, it would incur a switching cost.
APPENDIX 12: PESTL ANALYSIS
POLITICAL
Bahrain is vulnerable to local and regional political instability that stands in front its economic prosperity. The
GCC diplomatic rift and isolation of Qatar may diminish investments and trade, costing the countries billions
of dollars. The borrowing of funds will be costly for the whole region. Support extended by Saudi Arabia in
terms of politics and finance will improve Bahrain’s long term political standing and economic situation.
Additionally, the establishment of NEOM industrial and business zone is part of their diversification plan. Since
the GCC countries are highly interrelated, political risk remains high for all involved in the GCC and since Alba
is the effort of the government, it could have a great impact on Alba if the political situation took a downturn.
LEGAL
Bahrain’s Commercial Companies Law has been recently amended to capture FDIs, where 100% foreign
ownership is permitted and Bahraini shareholders are not required; this leaves very few restrictions for setting
up in Bahrain. Investors operating at Bahrain gain from a better balance sheet in comparison with GCC, given
Bahrain low operating costs, incorporating Set-up, Taxation, Transportation and Port handling. The coupling
of these laws with Alba Line 6 expansion will encourage international downstream companies to invest in
Bahrain; those could be small or medium sized enterprises such as, auto parts suppliers. Furthermore, there is
a specific percentage of Bahrainis that must be employed in proportion to non-Bahrainis. Alba’s Bahrainisation
rate is the highest with 84.2%, contributing to the economy and avoiding legal formalities.
ECONOMICAL
Oil prices: In order for Bahrain to balance its budget and save Bahrain from devaluation risk, it requires oil price to reach $99 per barrel in comparison with $73.1 per barrel for Saudi Arabia. In more than two years,
Brent crude reached its highest trading level but a $40 difference is underlying between it and Bahrain’s breakeven price.
Credit worthiness: Bahrain’s BB- rating was downgraded to B+ in December 2017, which is highly speculative due to external liquidity being extremely weak, and its credit outlook was revised from Negative to
Stable by S&P Global Ratings. Noting that, the rating company factored the external support extended to Bahrain from KSA.
US Dollar: The Fed rate hike will be strengthening US Dollar against other currencies, making sovereign and corporate borrowing costs expensive when dominated in US Dollars.
Influence on Alba: The above economic factors should make it difficult for Alba to secure low borrowing costs. However, Alba’s resilient financial stability is fueling competition between national and international
banks to finance the remaining $1.2 billion of Line 6 project total outlay of $3 billion.
Deflationary fiscal policy: Bahraini government will remove subsidy on Diesel gradually, increasing Alba’s cost of production.
Value Added Tax: The government plans to impose VAT in 2018 but is not expected to impose VAT of double digits, avoiding triggering of products prices and political breakdown. VAT will generate $568 million
for the government, which is beneficial for Alba as it is partially owned by the government through Mumtalakat.
Corporate taxation is inevitable in Bahrain. The burden must not be passed to the final consumer, escalating Alba’s cost. But the tax will erect a favorable environment for investments as credit ratings will improve,
public debt service cost will fall and sensitivity to oil prices will decrease. However, currently the government has provided no indication towards corporate taxes.
Aluminium Cartel: Russia is suggesting the formation of an aluminium cartel similar to OPEC. The main objective is that all top producers and exporters approve a singular policy with regards to standards and
technologies, controlling the overcapacity challenge presented by China. The cartel could be including Russia, Bahrain, Qatar, China, Saudi Arabia and UAE. However, the formation of a Cartel such as OPEC is doubted,
especially that the political issues within its members are worrying. Also, their doubts about OPEC’s success and continuity as its members fail to be disciplined and comply with the agreement articles.
SOCIAL
Bahrain invests in formal education; with Tamkeen (labor fund) for developing excellence in
human assets, which trains employees to be qualified engineers or technicians. This disregards
the need for migrating employees. Similarly, Alba invests in training and development of their
human capital and the presence of human capital within Bahrain is beneficial.
TECHNOLOGICAL
Alba is employing DUBAL’ DX+ Ultra Technology for Line 6 expansion. DX+ Ultra Technology cells are highly
energy-efficient; allowing Alba to operate at high amperages and optimized performance levels. This technology
will improve energy efficiency, allowing Alba to increase metal production with no increase in overall energy
consumption.
STRONG IMPACT
UNFAVOURABLE FAVOURABLE
WEAK IMPACT
P
L
E
S
T
APPENDIX 13: BOARD OF DIRECTORS
Chairman
Shaikh Daij Bin Salman Bin
Daij Al Khalifa
Appointed as Alba’s Board of Directors Chairman on February 27, 2014 (member since 2005) and is Executive Committee Chairman of Nomination and Remuneration Committee. His previous directorship titles include Chairman of ASRY Marketing Services limited (ASRMAR) U.K and Arab Shipbuilding and Repair Yard Company (ASRY Bahrain), both ended in 2015; he is United Arab Shipping Company, Dubai-UAE Vice Chairman (ended in June 30 2015). Previously he Chaired GCC Patent Office, Bahrain Airport Company, the General Organization of Sea Ports. He had positions in several Bahraini governmental sectors, incorporating the Ministry of Industry and Commerce and the Ministry of Finance. He was awarded “Personality of the Year” in 2010 by Seatrade Middle East & Indian Subcontinent.
Director
Ali Al-Shamrani
Mr. Al Shamrani owns experience in petrochemicals industry that exceed a quarter of century. Currently, he works as CEO Business Support & Executive Affairs in SABIC CEO office, reporting directly to the Vice Chairman. His start with them (19890 was as computer programmer and then promoted to analyst and planner. He provided assistance in the implementation of a software project (the Baan enterprise Resource Planning (ERP)). Since then, he was taking responsible positions at SABIC, which include being a SABIC Dubai Manager and then General Manager, Asia/Pacific that is in Singapore. He is Yanbu National Petrochemical Co. (YANSAB) Board member.
Director
Yusuf A. Taqi
Mr. Taqi has experience in the financial services sector for above 25 years and is an Islamic finance recognized leader. He formulated and enacted new guidelines and standards in Bahrain and other countries Islamic financial institutions and organizations’ accountancy Board. He became the company’s Board member in 2008. He Chairs Alba’s Board Audit Committee, Manara Development CompanyB.S.C. (c), North Start Holding, Amar Holding Company B.S.C. (c); and Pan Arabian Gourmet and Tadhamon Capital Board member. He was Kuwait Finance House Deputy Manager (2003-06) before advancing to Al Salam Bank CEO (2006).
Director
Osama M. Al Arrayedh
Mr. Al Arrayedh career initiated in Bahrain’s Ministry of electricity and Water as System Developer (1986). He was the Chief Computer systems Development and Maintenance from 1992 to 2002. He became the Ministry of Industry Director Hi-Tech and Informatics 2003 and Assistant Undersecretary for Industrial development in 2005. Now he is the Industry Affairs Undersecretary. In 2006, he became Alba’s Board member. Since 2008, he was Gulf Organization for Industrial Consultancy Board member.
Director
Suha S. Karzoon
Is currently Mumtalakat’s CFO since September 2014; managing the Finance, Treasury and external Portfolio Functions and implementing effective financial policies, reporting financials and build an optimal capital structure meeting short-run and long-run strategic goals. Formerly, she was Mumtalakat’s COO supervising corporate functions (Legal, Risk Management, HR and Administration and IT) while ensuring their regulatory and legal adherence. She became Alba’s Board member on June 10, 2015, making her the first woman member. She has more than 17 years accounting and finance experience, audit, advisory and statutory reporting services.
Director
Mutlaq H. Al Morished
He was appointed Alba’s Board of Directors member (2003-2014) and is a member of the Executive Committee. Currently, he is the Chief Executive of National Industrialization Company (TASNEE) in Saudi Arabia. He was the Executive Vice President Corporate Finance at Saudi Basic Industries Corporation (SABIC), Vice President of Shared Services, President of the Saudi Petrochemical Company and the Saudi Iron Steel Company. His experience showcases his Corporate Finance expertise. He currently serves on the Board of National Mental Manufacturing & casting Co. (Maadaniyah) and AlinmaTokio Marine Company.
Director
Uwaidh Harethi
Mr. Uwaudh Al-Harethi was previously the Executive Vice President, Chemicals. He works on improving operations in a culturally diverse environment, translate conceptual models into specific growth strategies and plan and execute global business development campaigns that improves market share, gross revenue and EBITDA. As a Chemical Engineer, Mr. Uwaidh Al-Harethi earned a Master degree in Business Administration focused on Management Information Systems from King Fahad University of Petroleum and Minerals.
Director
Ahmed Al Jabr
Ahmed Al Jabr has more than 30 years’ experience in SABIC in the top-level management Executive in different management, manufacturing and technical operations. He currently holds the post of SAFCO and Ibn Al-Baytar and previously served in the Ibn Rushd and Ibn Al Baytar Board of Directors. He practices his expertise in manufacturing, operations and projects, effective work with Government bureaus and diverse range of clients and suppliers. Mr. Al Jabr also involves in social events and community contributions.
Director
Yaser E. Humaidan
Mr. Yaser E. Humaidan has over 20 years banking experience as an Investment professional. This includes enterprise finance strategy and financial assets (equities, fixed income, hedge funds, private equity and structure investment). He assists companies to attain stability and growth in fluctuating economies and handles an extensive client-centric portfolio oversight and management skills. He previously worked as a member of the Fixed Income/Derivatives Unit at Gulf International Bank and later became the Head of Investment. Additionally, he served on the Board of Bahrain Bourse.
Director
Dr. Mohamed Kameshki
Dr. Kameshki became a member of Alba’s Board of Directors on February 27, 2014. His profession includes being a renowned Bahraini consultant for over 25 years and a social responsibility advocate. As a business strategist, he had helped local companies on forming strategies, attain operational excellence, customer satisfaction and hire resourceful human capital. He prioritizes social responsibility and community contribution by coaching and supervising the Bahraini Youth Delegation Programme (Junior leadership programme) for more than 7 years. The programme was able to land some participants to leading positions.
APPENDIX 14: MANAGEMENT TEAM
EXECUTIVE MANAGEMENT
Chief Executive Officer
Tim Murray
Deputy CEO and Chief Supply Chain Officer
Ali Al Baqali
Chief Marketing Officer
Khalid A. Latif
Chief Power Officer
Amin Sultan
Waleed Tamimi Chief Admin Officer
Waleed Tamimi
Acting Chief Operations Officer
Hassan Noor
He joined them in May 2007 as General Manager of Finance. He was
also appointed as Alba’s Chief Finance & Supply Officer, Chief
Financial Officer and Chief Marketing Officer.
He has been Alba’s Chief Financial Officer, being responsible for
Financial Accounting & Controlling, Strategic Supply & Planning, Legal, procurement & warehousing and
Calciner & Marine since June 2013.
Since 30th of September 2015, he was Chief Marketing Officer at Alba, in
alignment with the company strategy of developing Bahrain nationals at
Alba to hold chief leadership positions. He is responsible for leading the global marketing
strategies in Alba, driving innovation in the divisions.
In 2017, he is Chief Power Officer for the Potline 6 project for new
1972MW Power Station and 2249 MW ISO Power & Utilities. He was
Alba’s Chief Operations Officer (COO) from March 2016 to May 2017 and
contributed productively and efficiently to increase metal
production by 11,000 mt.
He has been Alba’s Chief Administration Officer since
September 2017, leading Alba’s Administration divisions. He was
Alba’s Operational Excellence Manager since 2013, leading
operational excellence initiative and continuous strategy and roadmap
improvement.
On 25th of May 2017, he became Alba’s Acting Chief Operations
Officer, taking care of Operations and maintenance of all Carbon Plants, Pot
lines, and Maintenance and Workshop Services. He joined as
Alba’s Senior Operator Alba in 1997, spending 20 years serving Alba.
MANAGEMENT TEAM
Director of Casthouse Abdul Rasool Ahmed Abdul Rasool Acting Manager Line 6 Project – Reduction Hani Ali Saleh Abbas Director Line 6 Startup Abdulla Habib Ahmed Ali Acting Manager Casthouse Maintenance & Services Hassan A. Qader Director of Marketing Boris Santosi Acting Manager Line 6 Project – Casthouse Khalil Ebrahim Suhail
Acting Director Carbon and Services Fuad A. Hussain Alasfoor Manager Calciner & Marine Taleb Al Ansari Director Line 6 Smelter Project and Engineering Shawqi Al Hashimi Acting Manager Carbon Operations Ahmed Shehabi
Director of Power & Utilities Steve Davison Acting Sales Manager Asia Pacific Enoch Kwok Yee Lok Sr. Manager Operations Support Services Nabeel Ebrahim Al Jallabi Sr. Manager Process Control & Development Raghavendra K.S.R
Manager Operational Excellence Ahmed Bahar Manager Engineering & Infrastructure Gopichand J. Talreja Chief Internal Auditor & Risk Management Officer Bryan Harris Manager Reduction Maintenance Haitham Salman Ahmed Yusuf Al-Saegh
Manager Strategic Supply & Planning Faeq Abdulrahim Manager Customer Services & Marketing Operations Hisham Yousif Alkooheji Manager Customer Technical Support Hussain Al-Malali Sr. Manager HR Hamad Al Shaibeh
Manager Line 6 – Contracts & Procurement Jordan Samuel Screen Manager of Project Controls Line 6 Project Karim El Rahimy Manager Investor Relations & Corporate Affairs Eline Hilal Manager Power Expansion Project Khaled Mersal
Manager Power Operations Eskandar Abdulnabi Marhoon Alsari Sr. Manager Safety, Health and Environment Mohamed Khalil Ebrahim Saeed Manager Line 6 Start-up Services Khalid Ahmed Shareef Manager Sales MENA Mohamed Khalid Juma
Manager Reduction Line 6 Start-up Khalil Ebrahim Mohammed Manager Reduction Lines 1-3 Mohammed A. Rahim Zaina Manager Line 6 Carbon Start-up Masood Toorani Manager Line 6 Project – Carbon A. Rahim Mohd
Manager Power Maintenance Mathew Tharakan Manager Training Rawdha Salman Alaradi Manager Line 6 Project – Safety Nezar Hameed Ali Manager Reduction Line 5 Mohsen Ahmed Shukrallah
Manager Sales and Marketing – Americas Patrick Hudson Manager Procurement & Warehousing Mustafa A. Rahman Manager Line 6 Engineering & Technology Transfer Paul Otteson Manager Financial Accounting and Controlling Ahmed Abdulqader Mohamed Yusuf
Manager Project Construction Line 6 Project Robert Byrne Manager IT Syed Afaque Ahmed Hashmi Manager Reduction Line 4 S. Hussain S. Fadhel Acting Manager Carbon Maintenance Hussain Ebrahim Mohammed
Manager Legal Stephanus Grobler Acting Manager Casthouse Operations Hussain Faqihi Acting Manager Public Relations Fatema Al-Mohri
APPENDIX 15: AWARDS & ACHIEVMENTS
Year Awarded Award Recognition
2010
• IFTDO International Trophy
• Occupational Health & Safety Gold Award
• International Safety Award
• Rewarding its commitment to maintaining safety, health and well-being in workplace
• Recognition of Alba’s effort in providing workplace safety practices
2012 • Best Company for Investor Relations in Bahrain
• 2nd place in 2012M: Communications / KWDigital Middle East Web Ranking • Alba’s website earned 2nd place in web ranking survey
2013
• General Counsel of the Year Award
• Ministry of Labour Award for Excellence in Vocational Training and Development
• 2013 eGovernment Excellence Award in eEconomy category
• Gulf Aluminium Council (GAC)’s Health & Safety and Environmental Award
• Best Company for Investor Relations
• Alba’s Laboratory included in top 5 (out of 41 smelter laboratories globally) laboratories in Baked Anode Round Robin 2012-2013 report
• IT Team of the Year
• Alba’s IT Manager won CIO of the Year Award
• Recognition award in “Best Application for Mobile”
2014
• International Safety Award
• 2014 Occupational Excellence Achievement Award
• 2014 Gold Award for Occupational Health and Safety
• GAC Health & Safety Award under smelters category
• International Green Apple Awards 2014 under the “Environmental Best Practice” category
• 3 IT Awards: Business & Commerce Application category, On the Cloud Project category, MEET ICT Personality of the Year 2014
• Her Royal Highness Princess Sabeeka Award for Bahraini Women Empowerment 2014
• Best Company for Investor Relations in Bahrain Award
• Recognizing Alba’s commitment in maintaining workforce’s safety, health and well-being
• Award for reduction in Alba’s 2013 injury rates
• Recognition for its safety management
• Gold winner for Alba’s project on “Fluoride Emission Reduction” a) For implementation of BI Solution through using Microsoft BI b) For Alba’s Private Cloud Solution based on Windows Server 2012 c) Awarded to Alba’s IT Senior Manager
• Recognition for Alba’s commitment to gender equality including equal opportunities
2015
• The Green Era Award 2015
• Best Corporate Governance 2015 in the Middle East (Industrial sector)
• International Safety Awards 2015
• Alba’s employee, Ahmed Janahi, awarded the Health and Safety Champion Award 2015
• Gold Award for Occupational Health and Safety
• Alba’s Chairman of Board of Directors was presented the Lifetime Achievement Award by the Middle East Business Leaders
• International Green Apple Awards 2015 (Gold category)
• Rewarding the company’s environmental accomplishments and sustainable initiatives
• Recognizing Alba’s in implementing good accountability practices, transparency and promotions of ethics.
• Alba’s effort in committing to maintain a safe workplace
• Awarded for his contribution in developing in Alba’s safety culture
• Rewarded for his superior leadership and contribution to business transformation and creativity
• Recognition for Alba’s project “Aluminium Smelter to Green Oasis”
2016
• Gold International Safety Award 2015
• Certificate of Excellence from R&D Carbon-Switzerland (RDC)
• Gold Award for Occupational Health and Safety 2016
• Best Nationalisation Initiative Certificate
• 2 Investors’ Community Awards: a) Leading Corporate for Investor Relations in Bahrain b) Best Investor Relations Professional in Bahrain
• Gold Winner of the Green World Award 2016 for Environmental Practice
• For the determination towards enforcing safety, health and well-being in workforce in 2015
• Rewarded for Alba’s completion of exceptional performance in Carbon sampling and analysis for 10 years
• Acknowledgement to Alba’s continuous improvement in workforce accident and ill health prevention
• For the company’s contribution towards nationalization and HR development in Bahrain
• Commendation for Alba’s long-term commitment towards environmental protection
2017
• Occupational Excellence Achievement Award and Significant Improvement Award by NSC
• British Safety Council’s International Safety Awards with Merit for 2017
• Gold Award for Occupational Health and Safety 2017
• Alba’s Sr. SHE Manager awarded RoSPA 2017 Guardian Angel Award
• Ethical Boardroom Corporate Governance 2017 Award in Middle East
• Winner of 2017 Most Innovative Aluminium Solutions GCC Award
• Recognizing Alba’s long-term investment in the safety of its workplace for employees
• For its commitment in 2016 workforce involving safety, health and well-being
• Honoured for the Sr. SHE Manager contribution towards Alba’s safety and health
• Excellence in Alba’s corporate governance policies involving respectable accountability
• Rewarding Alba’s adherence to the highest level of Environmental, Social and Governance (ESG) standards and for advancing local and international downstream aluminium industry
APPENDIX 16: LINE 6 EXPANSION PROJECT
PROJECT DESCRIPTION Alba expansion initiative of a new Potline - Line 6(L6) and Power Station 5 (PS5) will increase the annual
capacity by approximately 50% or 540,000 tones, boosting the total production capacity to 1.5 mtpa. The
operating and energy efficiencies will increase as the proprietary EGA DX+ Ultra technology will be used in
the 424 pots in L6. The project will make Alba the worlds’ largest single-site aluminium smelter when its
operations start by January 2019. The construction main works were initiated in 2016 and 25% of the project
was completed in Q3/2017.
PROJECT INFLUENCE During its construction, 2000 to 3000 people will be employed. Its operation will create
500 direct and permanent job positions in Alba. The downstream industry will grow and
many local and international downstream companies will be attracted to operate in
Bahrain. Hence, indirect jobs in the downstream industry will be created. Also, the
contribution of Alba to Bahrain’s GDP will increase from 12% to 15%.
PROJECT CONTRACTORS AND ADVISORS Alba contracted with Bechtel for L6 engineering, procurement and construction management (EPCM). The
Engineering, procurement and construction (EPC) contract for PS 5 is awarded to GE and GAMA Consortium.
They will be responsible for designing, engineering, procuring, constructing and commissioning a Combined
Cycle Gas Turbine Power Plant (PS 5) with 1,792 megawatts and efficiency of 54%. In Bahrain, the biggest and
most-efficient power station will be PS 5. In the GCC, it will be the first PS with H-class gas turbine technology,
marking Bahrain as world-class achiever. The Power Distribution System contractor is Siemens, which will be
constructing and commissioning High Voltage electrical network and providing Gas Insulated Switchgear
(GIS) that reaches to 220k V. The project financial advisors are J.P. Morgan, Gulf International Bank (GIB) and
National Bank of Bahrain (NBB), who provide consultation and assistance on Line 6 structuring and financing.
Line 6 supply of gas is secured for 10 years with Bahrain Petroleum Company (BAPCO). Loan line 6 was raised
by banks that fall in three different categories as shown in the table below.
PROJECT FINANCING The project had an initial outlay of USD$3.5billion but now has CAPEX of USD$3billion
due to the fall in global crude oil prices. The CAPEX is the total cost for building L6, PS5
and other industrial services. In order to finance the project, Alba has secured a
USD$1.5billion syndicated loan from banks (Convention and Islamic Facilities) making
it the largest corporate loan in Bahrain’s history. The details of the loan are detailed
below. Alba plans to secure the loan’s second tranche from ECAs within 2017 second
half, amounting USD$1.2 billion. The rest 10% will be self-financed, amounting
approximately USD$300 million.
Principal Amount USD$1.5 billion Conventional Facility $882 million
Islamic Facility $618 million
Interest Margin 325 bp/annum (LIBOR)
Tenor 7 years (principle paid in 8 semi-annual installments)
Grace Period 3 years
Mandated Lead Arrangers & Bookrunners Group Lead Arrangers Group Arrangers Group
Standard Chartered Bank (Hong Kong) Limited Saudi National Commercial Bank Burgan Bank K.P.S.C.
Arab Banking Corporation B.S.C Riyad Bank Mashreqbank PSC
ABC Islamic Bank (E.C.) National bank of Kuwait S.A.K. Bahrain branch Bahrain Islamic Bank B.S.C.
Gulf International Bank B.S.C. Arab petroleum Investments Corporation (APICORP) Arab Bank plc- Retail Branch
Ahli United Bank B.S.C. Kuwait Finance House (Bahrain) B.S.C. Al Baraka Islamic bank B.S.C. (c)
National Bank of Bahrain B.S.C. National bank of Abu Dhabi (Bahrain Branch) Bank of Baroda
Credit Agricole Corporate and Investment Bank Al Ahli Bank of Kuwait K.S.C.P.
Bahrain Bank Kuwait BBK B.S.C.
Note: Riyad Bank acted as the Islamic Agent and National Bank of Abu Dhabi (Bahrain Branch) acted as the Global and Conventional agent.
LINE 6 VALUATION
Discounted Cash Flow Valuation
(in BHD ‘000) 2016 2017 2018 2019 2020 2021 Total
EBITDA from Line 6 127,645 131,259 135,075
(-) CAPEX (338,400) (507,600) (282,000)
Free Cash Flow (338,400) (507,600) (282,000) 127,645 131,259 135,075
Terminal Value 2,058,271
Total (338,400) (507,600) (282,000) 127,645 131,259 2,193,346
N 1 2 3 4 5 6
WACC 8.96% 8.96% 8.96% 8.96% 8.96% 8.96%
Present Value (310,583) (427,578) (218,017) 90,571 85,480 1,310,959 530,832
Equity Value 530,832
No. of Shares 1,420,000,000
Target Price Per Share for Line 6 0.374
Using the DCF variables of WACC (8.96%) and terminal growth rate (2.25%), we calculated the value that line 6 will add to the share price of Alba. The target price
derived is 374 fils per share.
Assumptions
Year 2017 2018 2019 2020 2021 Assumptions
LME Aluminium Price Per Unit (BHD) 733 740 747 754 761 Based on forecasted aluminium prices converted to BHD at rate of 376 fils/$
Estimated Cost per Unit (BHD) 488.8 488.8 488.8 488.8 488.8 Estimated cost of producing primary aluminium product is $1,300 per tonne,
converted to BHD at rate of 376 fils/$
Source: Team Estimates
APPENDIX 17: ALBA’S PRODUCTS, CLIENTS AND SEGMENTATION
Aluminium Products
Standard Ingots Alba’s standard ingots are sold to consumers who wish to re-melt this residual form of aluminium in their own furnaces, to produce a range of different end products. Approximately 400,000
metric tons of standard ingots are produced yearly.
Rolling Slabs Rolling slabs are used in rolling mills to manufacture aluminium foil and sheet products, containers and utensils. The total annual production capacity of their rolling slabs currently stands at
about 140,000 metric tons per annum
Foundry Alloy Ingots
Foundry alloy ingots are mostly used by the automotive industry to manufacture high quality automotive wheels, truck hubs and gas pump nozzles. About 120,000 metric tons of foundry alloy ingots are produced yearly
Extrusion Billets Extrusion is the procedure of forcing aluminium into a precisely shaped opening flowing in to shape it. Extrusion ingots are broadly used in the construction industry (for windows and door
frames), transportation, engineering, and consumer durables. About 380,000 metric tons of extrusion ingots are produced yearly.
T-Ingots Alba’s Tee Ingot is similar to the Standard Ingot, but is specifically appropriate for consumers who require its T shape for cost-effective handling, storage and particular form of furnace.
Liquid Metal Aluminium that is highly pure with aluminium content of at least 99.86 per cent, is sold in liquid form to companies such as Midal Cables, Bahrain Alloys Manufacturing Company, Bahrain
Welding Wire Products Mfg. Co., Bahrain Atomisers International and AluWheel, and others.
Other Products
Anodes It is carbon blocks used to conduct electrical energy during the procedure of manufacturing primary aluminium. Alba produces 550,000 metric tons yearly through its three-computerized
carbon.
Power Alba has its own power plant generating an overall power volume of 2,249 MW ISO (nearly equal to the power used in the Kingdom of Bahrain as a whole).
Water Alba has a seawater desalination plant that was constructed in 2001 as a fundamental part of the company’s Calciner plant.
Calcined Coke Calcined petroleum coke is the main raw material essential for the manufacturing of carbon anodes used in the aluminium smelting procedure.
Changes in customer requirements in specific sectors for aluminium
Transport Construction Consumer Goods
Aluminium is light for vehicles (trains, plains, automobiles, and ships) to reduce rising fuel expenses and Co2 emissions
Aluminium which is highly durable, resisting climate changes Aluminium that lasts long that for reuse in appliance components
Strong for transportation vehicles, such as heavier loads for improved capacity
Strong and withstanding materials for rails and bridges Goods with lesser requirements in terms of energy for lower CO2
emissions
Encompasses higher tensile & strength for safe vehicles Aluminium which has reflective finishes to enable efficient light
management, hence, reduced consumption of energy Aluminium with strong grades, avoiding recycling expenditure
Aluminium that lasts long that allows for reutilization and ‘cascading’ of components for different infrastructure types
Aluminium which is versatile, enabling dynamic designs
Flexibility in the metal Products which are prefabricated to quicken construction time
Consumer/Clients Details Segment
Ronal Wheel RONAL Company is the pioneer of light alloy wheels in the world market. Alloy wheels Maxion Wheels Maxion Wheels and its subsidiaries have been supplying OEMs with the highest quality wheels and most innovative technologies Aluminium wheels GARMCO Gulf Aluminium Rolling Mill Company (GARMCO) is one of the largest downstream aluminium facilities in the Middle East. Aluminium facilities
Midal Cables Limited Substituting Olex Cables to manufacture Aluminium Rods, Wires and Overhead Conductors for Electrical Transmission Manufacturing Aluminium Rods, Wires and
Overhead Conductors for Electrical Transmission Hero Motocorp India Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world’s largest manufacturer of two - wheelers, based in India. Manufacturing aluminium two – wheelers Capral Australia Capral is Australia’s largest manufacturer and distributor of aluminium profiles Distribution of aluminium profiles
ENDNOTES
1 Countries with the largest smelter production of aluminium from 2010 to 2016 (in 1,000 metric tons). (n.d.). Retrieved from https://www.statista.com/statistics/264624/global-production-of-aluminium-by-country/
2 Alba. (2012). Corporate Brochure (p. 4). Retrieved from http://www.albasmelter.com/mc/newsletters/pdf/corporatebrochure2012.pdf
3 The Global Aluminium Market Outlook , A. (2017, May). The Global Aluminium Market Outlook. CRU Aluminium . Retrieved from http://www.valuminium.ca/media/files/Aluminium_Market_Outlook_Quebec_2017.pdf
4 Aluminium Bahrain B.S.C. (Alba) . (2016). Annual Report 2016. Retrieved November 27, 2017, from http://www.albasmelter.com/IR/Publications/Documents/Annual%20Reports/AnnualReport2016.pdf
5 International Monetary Fund. (2017, October). World Economic Outlook (October 2017): Real GDP Growth. Retrieved November 27, 2017, from http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD
6 BMI Research. (2017, February 1). Aluminium: 2017 Hinging On China Supply & Demand Direction. Retrieved December 15, 2017
7 Murray, T. (2016, November 23). Tim Murray, CEO, Aluminium Bahrain (Alba): Interview. Oxford Business Group. Retrieved November 23, 2017, from https://www.oxfordbusinessgroup.com/interview/tim-murray-ceo-aluminium-bahrain-alba-interview
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