RBC Capital Markets, a global investment bank providing banking, finance, and capital markets services, has reduced its ratings for the Norwegian aluminium and renewable energy company Norsk Hydro ASA from "outperform" to "sector perform". The revision in investment outlook follows Norsk Hydro's share decline by 3.2 per cent on Tuesday, November 21, indicating a probability of the company's bearish performance amid shifting market conditions.
Image Source: Norsk Hydro
The anticipated aluminium price fall in the near future due to increased production, backed by alumina supply ease and new capacities commissioning in India and Indonesia, is likely to weigh on Hydro's revenue. According to RBC's projection, aluminium prices, which have risen by over 5 per cent year-to-date, will decline by 7 per cent from current spot levels.
Analysts at RBC Capital Markets have also cautioned that Hydro's high correlation with aluminium prices is vulnerable, even though the company's financial performance benefits from the price rally and robust cost structure.
Hydro's financial dip in Q3 2024
In the third quarter of 2024, Hydro saw some financial patches, even though the primary aluminium sector played a driving force. In the said quarter, the company saw a revenue of NOK 50,089 million versus NOK 50,944 million in Q2 2024. Similarly, earnings before financial items, tax, depreciation and amortisation (EBITDA) recorded a sequential dip from NOK 6,044 million to NOK 5,934 million.
Hydro Extrusions played a spoilsport in the quarter, generating adjusted EBITDA of NOK 879 million, down by 36 per cent from NOK 1,377 million in Q2 2024.
Investments in the quarter also decreased from NOK 7,305 million in Q2 2024 to NOK 3,462 million in Q3 2024.
How did aluminium prices play a contributing factor in the Q3 fiscal?
Record-high aluminium prices through the third quarter of 2024 resulted in a year-on-year increase in Hydro's adjusted EBITDA from its primary aluminium business, reaching NOK 3,234 million compared to NOK 2,520 million in Q2 2024 and NOK 1,379 million in Q3 2023. The global aluminium price growth even drove Hydro's year-on-year revenue and EBITDA in Q3, up by 12 per cent and 200 per cent, respectively.
This suggests a strong correlation between global aluminium prices and Hydro's financial performance. If the high price of aluminium has fueled the company's market position, then a decline in these prices will likely impact its financial growth. So, projecting the downtrend in aluminium prices and its effect on Hydro, RBC Capital Markets has revised the target price to NOK 76 compared to the previous NOK 77.
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