We initiate coverage on the Qatar Aluminum Manufacturing Company (QAMCO)
with a target price (TP) of QAR 1.77 per share, implying a 10.5% upside. At the
current market price, the stock trades at a P/E of 11.0x, based on our FY 2023
estimates. We have used Discounted Cash Flow (DCF) and Relative Valuation (P/E)
methodologies to value the company.
• Weakening demand amid slowing global economic growth dragging global
aluminum prices lower. Aluminum is one of the most widely used metals in the
world, with the construction, automobile, and packaging sector accounting for
over 60% of the demand. In terms of geographies, China alone accounts for
more than half of global aluminum production. After reaching near-record high
levels in March 2022, the prices have declined by more than 30% till the second
week of December. Market experts forecast global aluminum prices to fall
between 10% and 11% during FY23 as demand is likely to get hit by slowing
global growth in the wake of high inflation, rising credit costs, geopolitical
uncertainty due to the ongoing Russia-Ukraine confrontation, and a slowing
Chinese economic growth due to its zero-COVID policy.
• Medium to long-term prospects looks promising though for aluminum. In the
medium to long term, the transition towards clean energy and a greener
environment is likely to buoy aluminum demand. In the transportation sector,
sales of EVs are forecasted to continue increasing at a brisk pace worldwide over
at least the next 4-5 years which will drive the demand for aluminum. RE
projects like wind and solar predominantly use aluminum in turbines and
panels, respectively. This also provides a favorable outlook for aluminum as RE’s
share of total power generation is estimated to double by 2030 vs. 2020.
Construction would continue to remain a major driver with rising urbanization.
• QAMCO’s JV stands well placed to capitalize on upcoming demand but
earnings face pressure in the near term. QAMCO’s JV is one of the most
efficient aluminum smelters globally with a well-spread customer base.
Accordingly, in the medium to long term, we believe the company has the right
ingredients to capitalize on the upcoming opportunities. However, aluminum
prices are expected to remain under pressure in the near term owing to the
souring global outlook which is likely to hurt QAMCO’s earnings in FY 2023.