Sapa JV Achieves 9% Growth In North America For Norsk Hydro
Summary Today’s earnings from Orkla act as a partial pre-announcement for Hydro’s earnings next week, due to the 50/50 joint venture. The Norwegian government invests NOK 1.5 billion in Norsk Hydro’s new plant, with the European Trade Commission’s blessing. Hydro reports on February 10th – are there more surprises? In my most recent article about Norsk Hydro ( OTCQX:NHYDY ), I focused on some key drivers for EPS that I felt made the company a better value play than Alcoa, Inc. (NYSE: AA ). Today’s earnings announcement by Orkla ASA ( OTCPK:ORKLY ) gives us a sneak peek into Hydro’s earnings next week. Sapa is an extruded aluminum company, and is run as a 50/50 joint venture between, Orkla ASA ADR and Hydro: September 12, 2013 press release . Sapa is the global leader in extruded aluminum, and has a market share of 30% in North America and 26% in Europe. It offers a variety of solutions to its customers through five business segments, and is a leader in energy-efficient buildings. Sapa also has a strong presence in Asia and South America. “Orkla’s share of Sapa’s result was NOK -360 million in the quarter. Sapa’s results were negatively impacted by extraordinary costs related to the accounting write-down of fixed assets in China. Demand for extruded aluminium products in North America rose by 9%, primarily driven by growth in the automotive and building industry. In Europe, demand was on a par with 2013.” – Earnings release Sapa makes up only a part of Hydro’s earnings, but level demand in Europe is encouraging, as it has been recognized that the European economy may be contracting. Growth in North America appears robust at 9%, and bodes well given the current high aluminum price. It will be necessary to wait for Hydro’s results to get a full picture of the accounting write-down, but I anticipate that it will be similar to write-downs made by Alcoa this quarter, which had a negligible effect on share price. The write-down should not be taken out of context from the rest of Hydro’s earnings. The strong demand is evident, and should translate across all of Hydro’s primary aluminum business. A further NOK 1 billion in synergy savings is anticipated over the next 2 years. This fact will only enhance the value of Sapa for both of its parent companies. It is all cash that falls straight to their bottom lines at each earnings announcement. Norwegian Government Invests in Eco-Friendly Norsk Hydro Central to my thesis about Hydro is the idea that the company can continue to make more money by being as environmentally friendly as possible. In other news yesterday: “The EFTA (European Free Trade Association) Surveillance Authority has approved funding of NOK 1.5 billion from Enova for Hydro to test the world’s most energy- and climate-efficient aluminum production in a full-scale pilot plant at Karmøy, Norway.” – Hydro press release. Enova is a Norwegian state-supported agency for promoting efficient-energy consumption and renewable energy. The same day, and sticking with the eco-friendly theme, Hydro announced a new research partnership with SGL Group ( OTCPK:SGLFF ). The project will take place over the next three years, and is being funded by the Research Council of Norway. The goal is to develop new, energy-saving, carbon cathode technology for use in the primary aluminum production process. Any reduction in energy costs is a big saving for Hydro, but it also provides extra income, because Hydro sells any excess energy it produces into the national grid. Exactly how well Hydro performed over all in the fourth quarter is still somewhat of a mystery. If results from Alcoa are anything to go by, the company should surprise to the upside next week. The two press releases yesterday continue to confirm that the future looks bright for Hydro. I look forward to seeing the increased earnings created by the synergies at Sapa over the rest of the year. The stock has performed well over the last year or so since my first article about it . It would appear there is more to come. NHYDY data by YCharts Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks. Disclosure: The author is long NHYDY. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: This article is not intended as investment advice. It is for informational purposes only and expresses the authors opinion. The reader should conduct their own research and form their own opinion prior to initiating any position. 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