ALROSA: Financial results

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ALROSA (MCX: ALRS) reported strong financial results for 1Q2021. We reiterate our BUY recommendation for the company’s shares and set our target price for revision due to favorable global diamond market conditions and record dividend payouts.

Financial performance

In the 1st quarter of 2021, the company increased its revenue by 45% YoY to RUB 90.8 bln. (consensus 91 billion rubles) due to sales growth and the weakening of the ruble. EBITDA increased by 12% YoY to RUB 33.5 bln. (consensus 34 billion rubles), profitability fell to 37%. Free cash flow grew by 141% YoY to RUB 52.7 bln. (consensus 41.4 billion rubles) as a result of the sale of reserves. We expect ALROSA’s operating and financial performance to return to historical averages from Q2 2021, as the bulk of excess inventory was sold in the previous two quarters.

Debt load

Over the past 2 quarters, ALROSA did not make actual payments to shareholders, as a result of which net debt for the first time in the company’s history went into negative territory, reaching -22 billion rubles. According to our calculations, in the 2nd quarter of 2021, net debt will remain below zero, but by the end of 2021, after two dividend payments, the indicator will return to positive

Dividends

The Supervisory Board recommended paying 9.5 rubles. per share in the second half of 2020, which corresponds to 80% of free cash flow. During the conference call, the company’s management said that it sees no reason to deviate from the dividend policy, according to which at least 100% FCFF is distributed to dividends if the net debt / EBITDA value is below 0x. We expect that by the end of the 1st half of 2021, net debt / EBITDA will be -0.4x, and free cash flow – at least RUB 70 billion, which will provide a six-month dividend of RUB 10. per share (yield 9% to current quotes).

Industry state

The diamond industry continues its rapid recovery. In April 2021, India’s net imports of rough diamonds grew by 21% compared to April 2019, while net polished exports grew by 23%. Despite the surge in the COVID-19 pandemic in India, cutting businesses continue to operate with minor restrictions amid strong global demand for jewelry.

In March 2021, jewelry consumption in the United States increased by 30% compared to March 2019. A significant increase in demand coincided with a decrease in the supply of diamonds as a result of the closure of the Argyle mine, bankruptcies of some diamond mining companies and chronic underinvestment in the development of new deposits. As a result, diamond prices resumed their growth after a long-term decline. Thus, according to the results of the 1st quarter of 2021, the ALROSA price index increased by 7% q / q.

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