In aluminium we trust!

(1)

Recommendation: BUY – Target NOK 55 (48)

Prepared by Analyst: Daniel Johansson, Fondsfinans AS, tel: 23 11 30 61, e-mail: [email protected]

12.02.2015

This report was prepared by an analyst engaged by Fondsfinans AS, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. See page 12 of this report for Important Disclosure Information.

In aluminium we trust!

(2)

Softer seasonality aside – 4Q was indeed a record quarter, and ...

-

A record quarter as revenues grew 31%, and as underlying EBIT tripled y-o-y

-

Recovery is multifaceted; helped by prices, costs and FX in upstream units

-

Importantly B&A turned into a profit while Primary had a record high profit

... while near term outlook is soft, the right fundamentals are in place ...

-

Near term risks amid low LME prices, weak downstream fundamentals, ...

-

... and higher costs in B&A while realised premiums, FX, energy prices are up

-

The aluminium markets remains in deficit, and the structural demand is improving

... and so is strong DPS, FCFP, and we thus reiterate our BUY rating

-

The NOK 1.00 DPS is some NOK 0.20 above the market, i.e. Adding confidence

-

We have hiked our 2015-17E est’s by 8-11% on EBIT and upped our DPS

-

On a USD/NOK at 7.65 our mid-cycle margin SOTP price target goes to 55 (48)

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INVESTMENT CASE

(3)

Quarterly B&A and Primary EBIT (NOK m)

NORSK

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Source(s) : Hydro, Fondsfinans research

Annual underlying EBIT and (NOK m, %)

The main beat was in “upstream”

activities, which is good news!

- Primary EBIT was record high and

Hydro B&A returned to profit

- Energy and metal markets were solid,

Rolled weak

ESTIMATES/SENSITIVITIES

A record strong 4Q, and on the “right” lines as well as ...

We continue to see a solid EBIT

improvement in 2015-17E

-

This partly due to factors like FX,

e.g. given substantial gains y-o-y ...

-

... while demand and operational

improvements are key drivers too

-73

-63

-244

_-370

-379

-287

-269

-26

528

53

364 ₂₃₇

337

484

312

420 1,216

1,989

-500

0

500 1,000

1,500

2,000

2,500

EBIT Bauxite & Alumina

EBIT Primary Aluminium

0.0 % 2.0 % 4.0 % 6.0 % 8.0 % 10.0 % 12.0 % 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

(4)

NORSK

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DEVIATION TABLE

... upstream activities/energy did well (downstream worse)

Quarterly underlying EBIT by segment

Underlying EBIT (NOKm )

4Q13

1Q14

2Q14

3Q14

4Q14

FF est.

Diff. %

Cons.*

Diff. %

Bauxite & Alumina

-379

-287

-269

-26

528

137 285 %

283 86 %

Primary Metal

484

312

420 1,216

1,989

1,257

58 %

1,619

23 %

Metal Markets

190

141

100

171

221

148 49 %

125 77 %

Rolled Products

111

181

177

243

96

154 -38 %

164 -41 %

SAPA JV (part of Other)

-140

35

131

55 -22

75 -129 %

n/a

n.m.

Energy

383

435

169

234

360

275 -31 %

324 11 %

Other & eliminations

-306

-8

-52

-349

-308

-17

-1710 %

-187

65 %

Underlying EBIT

483

774

544 1,490

2,886

1,954

-48 %

2,391

21 %

(5)

Key assum ptions, changes

2009

2010

2011

2012

2013

2014

2015E

2016E

2017E

Realized Aluminium Price (USD/t)

0 %

-4 %

-2 %

-3 %

Average Alumina Price (USD/t)

0 %

1 %

-1 %

-2 %

Realized Premium Above LME

n.m.

0 %

11 %

2 %

0 %

Average Electricity Price (NOK/kWh)

-2 %

-1 %

0 %

4 %

-2 %

0 %

2 %

Aluminium cash cost (USD/t)

0 %

-1 %

0 %

-1 %

Alumina cash cost (USD/t)

0 %

-3 %

-7 %

-3 %

-2 %

Primary Aluminium Production (kt)

0 %

-2 %

0 %

Alumina Production (kt)

0 %

1 %

Pow er Production (GWh)

0 %

2 %

3 %

2 %

Metal Market External Sales (kt)

0 %

-1 %

-4 %

Rolled Products External Sales (kt)

0 %

-2 %

USD/NOK Average

0 %

13 %

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KEY ASSUMPTIONS AND CHANGES

Assumption changes are minor (mainly on volumes/FX) ...

Key assum ptions current 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Realized Aluminium Price (USD/t) 1,698 2,113 2,475 2,071 1,898 1,854 2,006 2,175 2,150

Average Alumina Price (USD/t) n/a 295 332 286 275 284 316 325 323

Realized Premium Above LME n/a 317 336 297 368 503 493 374 360

Average Electricity Price (NOK/kWh) 0.30 0.41 0.36 0.2185 0.29 0.23 0.26 0.29 0.26

Aluminium cash cost (USD/t) 1,675 1,750 1,988 1,791 1,540 1,478 1,527 1,605 1,606

Alumina cash cost (USD/t) n/a 238 270 259 259 252 244 255 255

Primary Aluminium Production (kt) 1,397 1,415 1,981 1,985 1,944 1,958 2,014 2,035 2,035

Alumina Production (kt) 2,090 1,976 5,264 5,793 5,377 5,933 5,998 6,020 6,020

Pow er Production (GWh) 7,897 8,144 9,581 10,308 10,243 10,205 10,000 10,000 10,000

Metal Market External Sales (kt) 1,448 1,717 2,091 2,470 2,383 2,642 2,634 2,456 2,419

Rolled Products External Sales (kt) 794 946 930 909 941 945 953 961 969

(6)

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ESTIMATES – ASSUMPTIONS

Estimate changes mainly in Primary (on an absolute basis)

Estimates changes table

Estim ates changes

NOKm

Curr.

Prev.

Curr.

Prev.

Curr.

Prev.

2015E

2016E

2017E

Underlying EBIT

10,449

9,424

12,314

11,379

11,541

11,527

11 %

8 %

0 %

- Bauxite & Alumina

2,282

880 2,179

1,797

1,988

1,901

159 %

21 %

5 %

- Primary Metal

5,498

5,911

7,137

6,576

6,709

6,561

-7 %

9 %

2 %

- Metal Markets

798

690

765

658

756

657 16 %

16 %

15 %

- Rolled Products

780

817

943

890

968

901 -5 %

6 %

7 %

- Energy

1,199

1,134

1,345

1,309

1,345

1,309

6 %

3 %

- Other & eliminations

-107

-8

-55

149 -226

198 n/a

n/a

EPS underlying

1.61

1.39

3.39

3.09

4.01

3.75 16 %

10 %

7 %

(7)

Valuation - SOTP Margin Capacity NOK/USD EBITDA Multiple Total Per share

Bauxite & Alumina - ow n production (mid-cycle) 60 6.3 7.65 2,892 8.0 23,134 11.3

Bauxite & Alumina - sourced (mid-cycle) 30 2.4 7.65 551 8.0 4,406 2.2

Primary Metal, ow n production (mid-cycle) 450 1.8 7.65 6,179 9.0 55,614 27.3

Primary Metal, Qatalum (mid-cycle) 750 0.3 7.65 1,721 9.0 15,491 7.6

- reduction due to Pow er contracts -832 -8,320 -4.1

Metal Markets, 2015E 886 9.0 7,974 3.9

Rolled Products 1,500 0.95 1,425 9.0 12,825 6.3

Energy (production 9.4 Tw h), full value 1,367 NOK 2.75/Kw h 26,125 12.8

SAPA JV (Hydro-Orkla 50/50) 8.0 8,476 4.2

Other & eliminations -436 8.0 -3,488 -1.7

Other assets incl. Solar 200 0.1

Net IB debt -128 -0.1

Minority interest (mainly Albras (51%), Slovalco (55%)) -5,911 -2.9

Debt adjustm. (debt equity investments, pension, other) -23,850 -11.7

Equity value 112,548 55 EV/EBITDA, implicit 9.8 Upside/(downside) 20.5 %

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VALUATION - SOTP

Price target to NOK 55 (48); a 21% upside supports a BUY

(8)

NORSK

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4Q a record quarter,

strong on the right

lines ...

... while near term

matters are of minor

importance for the

case

Despite the share

re-rating we continue to

see solid upside,

reiterating our BUY

ESTIMATES - SUMMARY

In sum: A rock-solid quarter, near term risks nothing major

Key figures (NOKm ) 2013 2014 2015E 2016E 2017E 4Q13 3Q14 4Q14

Revenues 65,359 79,073 111,003 109,928 108,796 16,507 20,130 21,948 EBITDA underlying 7,120 10,212 15,576 17,182 16,406 1,578 2,615 4,170 EBIT underlying 2,737 5,694 10,449 12,314 11,541 483 1,490 2,886 PTP -826 2,120 9,296 10,883 10,974 -769 832 -46 EPS reported -0.43 0.39 2.94 3.43 3.49 -0.39 0.29 -0.18 EPS underlying 0.72 1.61 3.39 4.01 3.66 0.05 0.47 0.87 Op.CF / share 2.51 2.96 6.41 6.64 6.66 1.30 0.56 2.18

(Op.CF - capex) / share 1.66 1.34 3.23 4.19 4.70 1.30 0.14 1.63

EBITDA* margin 10.9 % 12.9 % 14.0 % 15.6 % 15.1 % 9.6 % 13.0 % 19.0 % EBIT* margin 4.2 % 7.2 % 9.4 % 11.2 % 10.6 % 2.9 % 7.4 % 13.1 % DPS 0.75 1.00 1.10 1.20 1.00 Dividend yield (%) 2.5 % 2.2 % 2.4 % 2.6 % 2.2 % EV/EBITDA underlying 11.5 11.3 7.2 6.2 6.3 EV/EBIT underlying 23.9 17.3 9.1 7.2 7.5 P/E underlying 41.0 28.3 13.5 11.4 12.4 P/B 0.88 1.33 1.26 1.18 1.11 ROE -2 % 2 % 5 % 10 % 11 % ROCE 4 % 7 % 12 % 12 % 11 % ROIC -3 % -1 % 4 % 5 % 5 % NIBD/EBITDA 0.1 0.0 0.2 0.6 0.7

(9)

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ESTIMATES - SUMMARY

Accounts summary

P&L 2012 2013 2014 2015E 2016E 2017E 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E

Revenues 78,247 65,359 79,073 111,003 109,928 108,796 16,364 16,174 16,314 16,507 18,454 18,540 20,130 21,948 28,528 27,582 27,872 27,021 Revenue grow th (YoY) -20 % -16 % 21 % 40 % -1 % -1 % -25 % -26 % -13 % 5 % 13 % 15 % 23 % 33 % 55 % 49 % 38 % 23 % EBITDA, underlying 6,128 7,120 10,212 15,576 17,182 16,406 2,165 1,624 1,753 1,578 1,861 1,566 2,615 4,170 3,565 3,674 4,103 4,235 EBITDA margin (%) 8 % 11 % 13 % 14 % 16 % 15 % 13 % 10 % 11 % 10 % 10 % 8 % 13 % 19 % 12 % 13 % 15 % 16 % EBIT, underlying 1,252 2,737 5,694 10,449 12,314 11,541 1,077 518 659 483 774 544 1,490 2,886 2,158 2,417 2,868 3,006 EBIT margin (%) 2 % 4 % 7 % 9 % 11 % 11 % 7 % 3 % 4 % 3 % 4 % 3 % 7 % 13 % 8 % 9 % 10 % 11 % Pre-tax profit -171 -826 2,120 9,296 10,883 10,974 535 -943 351 -769 914 421 832 -46 1,998 2,101 2,531 2,666 Pre-tax margin (%) 0 % -1 % 3 % 8 % 10 % 10 % 3 % -6 % 2 % -5 % 5 % 2 % 4 % 0 % 7 % 8 % 9 % 10 % Net profit -1,245 -785 1,228 6,786 7,945 8,011 263 -611 321 -758 462 269 665 -168 1,458 1,533 1,848 1,946 Net margin (%) -2 % -1 % 2 % 6 % 7 % 7 % 2 % -4 % 2 % -5 % 3 % 1 % 3 % -1 % 5 % 6 % 7 % 7 %

Balance 2012 2013 2014 2015E 2016E 2017E 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E

Cash and cash equivalents 7,034 8,408 9,253 9,140 13,490 15,901 6,410 7,399 8,396 8,408 6,476 6,617 6,045 9,253 10,091 7,859 8,344 9,140 Other current assets 23,125 22,309 26,674 29,332 29,024 29,639 24,354 21,253 22,370 22,309 24,121 23,184 23,705 26,674 30,287 29,702 29,834 29,332 Property, plant & equipment 52,208 50,670 55,719 56,690 56,156 55,774 54,569 52,889 51,292 50,670 52,559 54,041 51,630 55,719 55,959 56,201 56,445 56,690 Other non-current assets 34,186 33,844 34,626 34,626 34,626 34,626 37,080 37,673 33,479 33,844 32,568 32,805 32,895 34,626 34,626 34,626 34,626 34,626 Total assets 116,553 115,231 126,273 129,789 133,296 135,940 122,413 119,214 115,537 115,231 115,724 116,647 114,275 126,273 130,963 128,389 129,249 129,789 Short-term interest bearing liabilities 5,956 6,194 6,039 6,039 6,039 6,039 5,324 5,786 6,201 6,194 6,255 6,141 5,007 6,039 6,039 6,039 6,039 6,039 Long-term interest bearing debt 21,760 18,676 25,539 21,591 19,843 19,756 18,225 18,361 18,414 18,676 18,586 19,806 20,681 25,539 24,252 23,165 22,278 21,591 Other short-term liabilities 11,566 12,687 13,077 16,504 16,268 16,907 16,210 15,188 11,567 12,687 12,075 11,544 11,493 13,077 18,095 17,323 17,222 16,504 Other long-term liabilities 3,427 2,411 1,676 1,676 1,676 1,676 3,898 3,468 3,256 2,411 2,833 2,894 2,496 1,676 1,676 1,676 1,676 1,676 Total liabilites 42,709 39,968 46,332 45,810 43,826 44,379 43,657 42,803 39,438 39,968 39,749 40,385 39,676 46,332 50,062 48,204 47,216 45,810 Equity 73,844 75,263 79,941 84,477 89,968 92,060 78,756 76,411 76,099 75,263 75,976 76,262 74,600 79,941 81,399 80,683 82,531 84,477

Equity share (%) 63 % 65 % 63 % 65 % 67 % 68 % 64 % 64 % 66 % 65 % 66 % 65 % 65 % 63 % 62 % 63 % 64 % 65 %

NIBD 20,682 16,462 22,325 18,490 12,393 9,894 17,139 16,748 16,219 16,462 18,365 19,330 19,643 22,325 20,200 21,345 19,974 18,490

Cash flow 2012 2013 2014 2015E 2016E 2017E 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E

Cash earnings 4,665 3,605 5,999 12,315 13,478 13,542 1,334 477 1,396 398 1,579 1,373 1,787 1,260 2,843 2,917 3,229 3,326 Operating cash flow 5,435 5,126 6,033 13,083 13,551 13,589 237 1,285 950 2,655 -751 1,179 1,151 4,454 4,248 2,729 2,997 3,108 Net CAPEX -3,731 -3,183 -1,674 -3,181 -6,500 -5,000 -552 -580 -542 0 -584 -683 -867 -1,047 -1,625 -1,625 -1,625 -1,625 Free cash flow after investm ents 1,704 1,943 4,359 9,902 7,051 8,589 -315 705 408 2,655 -1,335 496 284 3,407 2,623 1,104 1,372 1,483

Net debt repayments 934 2,245 -379 -1,376 -3,948 -1,748 -909 -7 537 0 155 -91 -803 -637 -1,287 -1,087 -887 -687

Equity issue / dividends -1,693 -1,669 -1,678 -1,922 -2,250 -2,454 31 -1,715 6 0 -77 -1,598 5 -252 0 -2,250 0 0

(10)

Aluminium prices: Hydro’s revenues are exposed to market prices of

aluminium. Our estimates and valuations are based on LME forward prices.

The actual price development may however differ substantially from these

assumptions

Currency exchange rates: Hydro is exposed to numerous currencies. The

company is highly exposed to USD on the revenue side. This is to some

extent balanced through currency derivatives. However changes in the

USD/NOK and USD/EUR are likely to have an impact on the company’s

earnings

HSE: Hydro’s activities involve Health, Safety and Environment risk. Serious

accidents or pollution could cause financial liabilities and loss of business

opportunities

NORSK

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4 UPDÀTE

RISK ASSESSMENT

(11)

Share data

NORSK

HYDRO –

4 Q1

4 UPDÀTE

Source(s) : Hydro, Bloomberg, Fondsfinans research

Shareholders

Source(s) : Hydro, Bloomberg, Oslo Boers, Fondsfinans research

Share information

Major shareholders as of

Shareholders Shares Ow n.ship

Nærings- Og Fiskeridepartementet 708.9m 34.7 %

Folketrygdfondet 150.1m 7.4 %

Clearstream Banking 64.2m 3.1 %

Euroclear Bank ('Ba') 35.5m 1.7 %

Norsk Hydro Asa 29.2m 1.4 %

State Street Bank & Trust 28.5m 1.4 % State Street Bank & Trust 27.3m 1.3 % The Bank Of New York Mellon 24.8m 1.2 % State Street Bank & Trust 22.0m 1.1 %

Dnb Nor Bank Asa 18.8m 0.9 %

Total 10 largest 1,109.2m 54.4 % Other shareholders 930.8m 45.6 % Total shares 2,040.0m 100.0 % 12.02.2015

Share data

12.02.2015

Sector

Metal

Reuters/Bloomberg

NHY.OL / NO

Risk rating

Medium

Outstanding shares (m)

2,040

Market cap (NOKm)

93,432

Net int. bearing debt* (NOKm)

7,572

Enterprise value (NOKm)

101,004

Free f loat

65 %

Average volume (mill)

4.5 High / low 52w

46.6 / 28.0

Weight

6.87 %

Rel. Perf . 3 / 6 / 12

6 / 28 / 50

Abs. Perf. 3 / 6 / 12

11 / 25 / 53

(12)

Disclaimer

Our research and general presentations, also available at our website

www.fondsfinans.no, are provided for information purposes only. They should not be used or considered as an offer to sell or a solicitation of an offer to buy any financial instruments. Any opinion expressed are subject to change without prior notice. Our research and presentations are based on information from various sources believed to be reliable. Although all reasonable care has been taken to ensure that the information herein is not misleading Fondsfinans AS makes no representation or warranty expressed or implied as to its accuracy or completeness.

Neither Fondsfinans AS, its partners and employees, nor any other person connected with our research and presentations, accept any liability whatsoever for any direct or consequential loss of any kind arising out of the use or reliance on the information given. They do not take into account the specific investment objectives and financial situation of any recipient. Investors seeking to buy or sell any financial instruments discussed or recommended in our research or in separate presentations, should seek independent financial advice relating thereto. Our research and materials from separate presentations may not be distributed, quoted from or reproduced for any purpose without written approval by Fondsfinans AS.

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Fondsfinans AS is constantly seeking investment-banking mandates, and may at any time perform investment banking or other services or solicit investment banking or other mandates from companies covered in our analysis and presentations. Fondsfinans AS may from time to time as part of its investment services hold positions in securities covered in our research and presentations. In order to avoid any conflict of interests Fondsfinans AS and its employees will always follow very strictly all internal regulations , recommendations from the Norwegian securities dealers association and relevant legislation and regulations from the supervisory official authorities. Internal holdings will be specified as part of shareholder information.

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Recommendation distribution as of 05.02.15:

Recommendation No Percent Recommendation No Percent

Buy 33 69 % Buy 2 6 %

Neutral 14 29 % Neutral 1 7 %

Sell 1 2 % Sell 0 0 %

Total 48 100 % Total 3

Companies in each recommendation category that have been investment banking clients over the past 12 months:

Our intention is to issue preview and update research on a quarterly basis.

Our investment recommendation is elaborated in accordance with “The Norwegian Securities Dealers Associations” standards.

This report has not been sent to the company for correction of any factual errors.

Fondsfinans is organized with Chinese walls between the Corporate Department and the Research/Broking Department. In addition, Fondsfinans has internal instructions and guidelines for handling sensitive information.

The analyst receives compensation that is impacted by overall firm profitability, including investment banking activities.

Fondsfinans is under supervision of The Financial Supervisory Authority of Norway. The recommendation has not been changed from BUY. The previous recommendation was issued 16.12.14.

Ownership per 04.02.15 in Norsk Hydro ASA:

Analyst (including his/her closely related persons or companies): 0, corresponding to 0% of the company share capital

Employees (including their respective closely related persons or companies): 25, corresponding to 0% of the company share capital

Group Fondsfinans (including the holdings of its Chairman, his spouse and their closely related companies, Erik Must AS and its 100% controlled subsidiaries):

8.634, corresponding to 0% of the company share capital

Fondsfinans may hold shares in Norsk Hydro ASA as a result of daily trading/market making. Information on such holdings is not given when of non-significant value.

Fondsfinans do not act as market maker in Norsk Hydro ASA. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months.

This report was issued and distributed 12.02.15. Definitions of ratings

Buy Low risk: with a potential of min 5%. Medium risk: with a potential of min 10%. High risk: with a potential of min 20%.

Neutral Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -20% to +20%. Sell Low risk: min 5%. Medium risk: min 10%. High risk: min 20%.

Risk ratings are based on price volatility, fundamental criteria and perceived risk. Ratings are: Low (L), Medium (M) and High (H).

Target: Our valuation as of today.