Deutsche Bank Says Sell Alcoa

Deutsche Bank has launched coverage of Alcoa Corporation AA with a Sell rating and $26 price target, citing downside risk from China aluminum chain oversupply.

The Split

Alcoa officially split into two entities on November 1, with the low-margin raw aluminum operations being separated from the high growth aerospace and automotive businesses. The former has continued with the Alcoa name, while the latter is called Arconic Inc ARNC.

The bulk of Alcoa Corp’s value can be inferred from its publicly-traded subsidiary, Alumina limited (ADR) AWCMY, and the brokerage views Alcoa’s history of restructuring/complex structure as valuation negatives.

“[A]ny downward correction in Alumina Ltd (on weaker bauxite or alumina pricing) is a downside risk. A complex structure and Arconic's pending 19.9 percent stake sales are additional headwinds,” analyst Jorge Beristain wrote in a note.

Global Oversupply

Given an oversupplied Chinese market, Beristain says bauxite prices could fall in medium-term, while alumina (which has rallied 62 percent this year) is expected to be in oversupply over the next three to four years as global capacity ramps. Notably, Alcoa gets more than 70 percent of its profits from upstream assets (Bauxite and Alumina).

“Aluminum also remains in global oversupply, limiting upside potential for Alcoa Corp’s key product outside of assets already contained within publicly traded Alumina Ltd.,” Beristain added.

Further, Alcoa Corp was left with about $1.5 billion of debt (about 10 percent of Alcoa Inc’s consolidated long-term debt) and nearly half (about 45 percent or $2.5 billion) of outstanding retirement obligations prior to the spin.

As such, the analyst noted that large liabilities and extreme sensitivity to commodity prices make Alcoa a high beta stock.

At last check, shares of Alcoa Corp. were up 0.55 percent to $29.13.