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On Thursday, Goldman Sachs analyst Matt Greene revised his outlook on Norsk Hydro (OTC:NHYDY) SA, downgrading the stock from 'Buy' to 'Neutral' and reducing the price target from NOK78.00 to NOK66.00. Currently trading at $5.23, near its 52-week low, InvestingPro analysis suggests the stock is undervalued. The downgrade reflects Goldman Sachs' commodities team's lowered alumina price forecasts, which anticipate an increase in supply from China and a relaxation of seaborne bauxite constraints.
In his report, Greene noted that while Norsk Hydro has approximately 20% of its London Metal Exchange (LME) aluminium hedged at $2400 per tonne for 2025, which is favorable compared to the current spot price of around $2300 per tonne, the cost of the feedstock for these hedges is set at approximately $450 per tonne versus the spot price of about $330 per tonne. This price difference suggests a potential 15-20% downside to Goldman Sachs' estimated EBITDA for Norsk Hydro in 2025-2026. Despite these concerns, the company maintains strong fundamentals with an Altman Z-Score of 7.65 and a healthy dividend yield of 3.13%, having maintained dividend payments for 16 consecutive years.
The analyst also pointed out risks in the downstream automotive sector, where macroeconomic uncertainties could delay the recovery of key extrusion end markets. This might result in postponing investments in the division, which has historically been funded counter-cyclically to the tune of around NOK4 billion per annum.
Furthermore, Greene highlighted the strategic importance of Norsk Hydro's secondary aluminium footprint in the context of recent export controls and trade tensions. However, he cautioned that the anticipated margin and volume recovery in the downstream segment is likely to take longer than previously expected.
Adding to the company's challenges, near-term risks to European metal premiums have emerged due to redirected flows from Canada in response to tariffs. This situation could put additional pressure on pricing in the near term, although the risk might be mitigated if trade exemptions are granted.
In other recent news, Norsk Hydro SA has experienced a shift in analyst sentiment with RBC Capital Markets downgrading the stock from an Outperform rating to Sector Perform. This adjustment comes alongside a slight reduction in the price target from NOK 77.00 to NOK 76.00. RBC Capital's decision follows Norsk Hydro's notable performance, which has been bolstered by strong aluminum prices. Analyst Marina Calero at RBC Capital noted that the anticipated easing of the alumina market's tightness later this year could lead to a decrease in aluminum prices by approximately 7% from current levels. Despite the downgrade, Norsk Hydro's appealing valuation and leading cost position within the industry are recognized as strengths that might mitigate potential downturns. The revised price target reflects updated estimates concerning raw material costs and extrusion margins. RBC Capital's analysis indicates a more cautious approach to Norsk Hydro as the aluminum market dynamics are expected to change in the coming months.
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