Australian aluminium stock Alumina Limited (ASX:AWC) has declined more than 30% this year. However, analysts who were recently bearish on Alumina shares are turning bullish, according to TipRanks insights.
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Melbourne-headquartered Alumina is in the aluminium supply business. It has a 40% stake in Alcoa World Alumina and Chemicals, which entitles it to a share in profits. The joint venture operates a global network of refineries and it has a large global market share.
Alumina has distributed an annual dividend of AU$0.06 per share over the past month. The stock offers a blockbuster dividend yield of 7.9%, compared to the sector average of 2.2%. At a payout ratio of 26.09%, Alumina’s dividend program appears sustainable.
Citigroup joins Goldman Sachs in upgrading Alumina stock
Citigroup analyst Paul McTaggart on Wednesday upgraded his rating on Alumina shares to a Buy from a Hold. McTaggart is a highly rated analyst with a respectable track record of recommending stocks. The analyst’s calls have resulted in profitable trades around 50% of the time, delivering an average return of around 13%. McTaggart assigned Alumina shares a price target of AU$1.60, which suggest over 27% upside potential.
Alumina stock earlier on Monday secured a rating upgrade from Goldman Sachs analyst Paul Young. The analyst upgraded the stock to a Hold from a Sell with a price target of AU$1.30, which indicates about 4% upside potential. Young is another highly rated analyst, whose calls have been profitable over 65% of the time with average returns of around 19%.
Why are analysts taking a favourable turn on Alumina?
Analysts are turning bullish on Alumina shares after Morgan Stanley issued an optimistic long-term aluminium price outlook. The bank predicts that the metal’s price will rise from current levels and remain high through 2030.
Aluminium price hit a peak of US$4,100 in March, shortly after Russia invaded Ukraine. However, the price has come down almost 50% since then. Metal prices have generally taken a hit across the board amid recession worries.
As central banks rush to increase interest rates to tame runaway inflation, many investors and businesses fear that a recession may be looming. The recession concerns have in turned weighed down prices of many industrial related commodities and stocks.
A ban on Russian aluminium could benefit Alumina’s business
While recession concerns remain a major source of trouble for the sector, a ban on Russia metal may provide some support for prices. The London Metal Exchange (LME) is seeking views on whether it should ban Russian metal from its system. LME is the world’s largest marketplace for industrial metals.
In addition to oil and other metals, Russia is also a major aluminium producer. If cutting off Russia from the LME disrupts metal supply, then aluminium may see a lift in price. An improvement in the metal’s price could benefit suppliers like Alumina.
Alumina share price prediction
Aside from Citigroup and Goldman Sachs, Alumina stock is tracked by several other analysts. According to TipRanks’ analyst rating consensus, Alumina stock is a Moderate Buy based on six Buys, one Hold, and one Sell. The average Alumina share price prediction of AU$1.62 implies nearly 30% upside potential.
Apart from analysts, financial blogs also view Alumina stock favourably. TipRanks data shows that financial blogger opinions are 88% Bullish on Alumina, compared to a sector average of 73%.
Concluding remarks
If global central banks’ rate hikes bring down inflation without causing a recession, aluminium producers like Alumina could see a rebound in prices and cost reliefs. Even if a recession hits the global economy, Alumina’s partnership with aluminium industry giant, Alcoa provides a strong element of stability amid market volatility.
