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Satyendra Pathak
Higher aluminium prices have led to a higher valuation of Qatar Aluminium Manufacturing Company (Qamco) as the company reported the highest ever half-yearly net profit in its history of QR288.5 million at the end of June 30 this year, QNB Financial Services (QNBFS) has said in a company report released recently.
“Qamco reported a net profit of QR288.5 million in the first half of 2021 as compared to a net profit of QR14.6 million in the same period last year. The increase in net profits is mainly attributable to higher aluminium prices and rising aluminium premiums,” QNBFS said in the report.
“We have increased Qamco’s target price, primarily due to higher product prices and the lower risk-free rate. After testing an 11-year cycle-low of $1,426 per tonne in April 2020, primary aluminium prices have been continuously rising to reach $2,542 in August 2021 and approaching their 11-year cycle-high of $2,792, which was last seen in 2011,” it said.
Supply shortages due to the drought in China, strong demand from China, coupled with expectations for global economies to normalize in the near future amid successful vaccine rollout in the developed countries, are the major factors currently driving aluminium prices higher.
Furthermore, QNBFS said, there is no immediate indication for cycle reversal in aluminium prices. “Hence, we tweak our aluminium price estimates for Qamco for 2022 and onward by 11.3 percent to $2,104, a level that equals the mid-point of the aluminium price cycle. We still would like to note that current prices of $2,542 are 20.5 percent above the cycle mid-point. Thanks to its state of the art plant and the support of its major shareholders, which enable Qamco’s JV Qatalum to act as an integrated producer, Qatalum is one of the world’s lowest-cost smelters,” the report said.
“Qatalum’s high margins, low indebtedness and lack of major expansion projects on the horizon warrant the continuation of its strong cash generation as well as attractive dividend yields for Qamco shareholders,” it said.
Qamco’s JV Qatalum’s revenue rose 20.7 percent year-on-year (y-o-y) in the first half of 2021 as a result of higher aluminium prices, and shifting product mix to more value-added products that mitigated lower sales volumes.
Qatalum recorded revenue of QR2.71 billion in the first half of 2021, despite a 4 percent decline in production volumes to 319k tonnes. On the other hand, a 21.5 percent y-o-y increase in average aluminium prices in the first half of 2021 were the primary reason for Qamco’s average sales prices to rise to $2,325 per tonne, up 26 percent y-o-y.
Furthermore, due to a higher value-added product mix, Qamco’s average premium rose by 77.2 percent y-o-y to $266 per tonne in the first half of 2021.
The demand for value-added products started to pick up in the fourth quarter of 2020 and has continued in the first half of 2021 as well, supporting Qamco’s higher aluminium premiums.
Higher product prices and premiums, coupled with Qamco’s high operating leverage, result in a significant margin expansion y-o-y. Qatalum recorded QR647.6 million in operating profits in the first half of 2021 that was up 294.1 percent y-o-y.
“We are revising our one-year target share price to QR1.45 mainly on higher long-term aluminium price expectations and a lower risk-free rate while maintaining our market perform rating on Qamco,” QNBFS said.
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