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Financial development, growth strategies and structural transformation
Kromtit, Matthew (2022) Financial development, growth strategies and structural transformation. PhD thesis, University of Glasgow.
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Strategizing economic growth and development in developing countries remains a daunting task for several years. Developing countries for long suffer from the many characteristics of underdevelopment. These range from slow economic growth to high levels of unemployment and poverty, increased population explosion with little or no corresponding increase in productive capabilities. For decades too, the economic literature has shown that several private and public sector-led strategies have failed to guarantee long term economic progress especially in developing countries. Whether mainstream or heterodox, what constitute appropriate growth strategies for developing countries is complex and highly debatable. This thesis therefore generally seeks to ignite better understanding of the strategies for growth and their determinants as well as to renew the debate on the essentials for strategizing growth in developing countries. The thesis attempts to provide some evidence on this general objective by investigating three specific topics in three empirical chapters. This is in addition to introductory and concluding chapters.
Chapter one motivates the thesis and specifies the objectives particular to each empirical chapter. Chapter two focuses on providing evidence on the role of financial development in determining whether developing countries follow or defy their comparative advantage. This area has been largely ignored in the literature on finance and development. Using dynamic panel data spanning across 132 developing countries and two-step system generalized method of moments (GMM), the results of this chapter mainly show that financial development in terms of the depth of banking sector tends to lead to comparative advantage – following (CAF) growth strategy but it tends to lead to comparative advantage – defying (CAD) in terms of financial efficiency. Based on these findings, chapter three introduces the analysis of financial and trade liberalization, interventionists policies and economic diversification in resource-rich developing countries. The empirical evidence reported in this chapter suggest that though liberal and interventionists policies matter in promoting economic diversification – in terms of enhancing manufacturing, the interaction of these policies with regulation could lead to an expanding services sector at the expense of manufacturing in resource-rich countries. Chapter four explores whether global value chains (GVCs) – related trade and conventional trade play a role in the structural transformation of resource-rich and non-resource-rich developing countries. The results show that the share of domestic value added in gross GVC-related exports and conventional trade have the tendency to aggravate employment and value addition respectively in the agricultural sector of Non-Resource-Rich Countries (NRRCs). In Resource Rich Countries (RRCs), the findings show that conventional trade have negative and significant impact on value-added in manufacturing while the share of foreign value added in gross GVC-related trade reports positive and significant impact on share of labour employment in services but not on the value added in the sub-sector.
Thus, the findings of the thesis tend to have implications for what constitute an appropriate development strategy in developing countries. Overall, the findings imply that all hope is not lost in developing countries. Given their factor endowments, developing countries could harness them with the appropriate combination of interventionists and liberal policies as well as the right mix of domestic and foreign value addition in promoting economic diversification and structural transformation. It remains however, a challenge for these countries to draw a line between what constitutes effective strategies or policies thereby leaving room for further research as suggested in chapter five of the thesis.
| Item Type: | Thesis (PhD) | |
|---|---|---|
| Qualification Level: | Doctoral | |
| Additional Information: | Supported by funding from the University of Jos and Tertiary Education Trust Fund, Nigeria. | |
| Subjects: | > | |
| Colleges/Schools: | > > | |
| Supervisor's Name: | Paloni, Dr. Alberto and Cerretano, Dr. Valerio | |
| Date of Award: | 2022 | |
| Depositing User: | ||
| Unique ID: | glathesis:2022-83153 | |
| Copyright: | Copyright of this thesis is held by the author. | |
| Date Deposited: | 04 Oct 2022 13:03 | |
| Last Modified: | 14 Oct 2022 12:31 | |
| Thesis DOI: | ||
| URI: |
| View Item |
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Norsk Hydro Delivered Slightly Better Results In Q2
- Q2 financial results show revenue up 7% from Q1 but down 5% Y-o-Y, with adjusted net income improving by 12%.
- Norsk Hydro ASA's share price dropped 21% since our bearish call in May.
- NHYDY's net debt increased by NOK 2.3 billion since Q1.
- The share buyback program continues.
- Some concerns about lower profit from their high focus on ESG.
Monty Rakusen
Norsk Hydro logo (Norsk Hydro presentation)
Investment Thesis
We continued our Sell stance on Norsk Hydro ASA ( OTCQX:NHYDY ) in May this year, as we pointed out that the share price had not priced in the drop in earnings.
It has now dropped 21% since our bearish call.
On the 23rd of July, NHYDY came out with their Q2 and FH 2024 results. It is a good time to revisit the thesis to see if our stance remains, or if we are turning more positive on this aluminum giant.
Financial Results
NHYDY often measures its results in terms of EBITDA. We seldom use EBITDA because, as Charlie Munger and Warren Buffett often pointed out, it is arguably meaningless.
We prefer to look at the trends of revenue, adjusted net operating profit, and free cash flow.
When there are deviations, on either a yearly or quarterly basis, we try to assess the reason for the deviation.
The revenue in Q2 was up 7% from Q1 at NOK50.9 billion, but when we look at it on a Y-o-Y basis it was down 5% from NOK53.6 billion.
The adjusted net income improved by 12% from NOK1.50 billion in Q1 this year to NOK1.68 billion in Q2. But to keep things in context, the net income was 51% lower on a Y-o-Y basis.
Adjusted EPS was NOK 0.97 per share. Here is the trend of the quarterly adjusted EPS.
Norsk Hydro EPS development (Data from Norsk Hydro. Graph by author)
Although the adjusted EPS is a far cry from the levels seen in 2022, it is at least on a positive trend. Investors and shareholders need to accept that this industry is highly cyclical, as are many other commodity-related businesses.
To drive home that point, NHYDY pointed out in their conference call with analysts that raw material cost increase in Q2 ended NOK 450 million higher than what they had guided back in Q1. They also communicated that they expect further increases in raw material costs.
On to the balance sheet and cash flow.
We have applauded NHYDY in the past, as we do like companies that hold low levels of debt.
This has changed over the last few quarters. Their net debt increased by NOK 2.3 billion since Q1. Adjusted net debt as of 30th June 2024 was NOK26.13 billion. However, on a Y-o-Y basis, the net debt has increased 64% from just NOK15.89 billion.
In terms of cash flow, the free cash flow in Q1 was roughly NOK2.8 billion.
NHYDY only pays dividends once a year, so when they do pay out the dividend, the cash flow takes a rather big hit in that particular quarter. There was a cash outflow of NOK 5 billion in Q1 related to 2023 dividends.
In addition to dividends, the good news is that they have also been busy buying back and canceling their shares.
Throughout 2023, Hydro bought back 21.16 million shares from the Norwegian government.
These were canceled on 25th of June this year.
During the AGM in May this year, the Board of Directors received authorization for a similar program to acquire up to 100 million shares in Norsk Hydro ASA to cancel the shares. The authorization is valid until June the 30th, 2025.
As of June 30th, 2024, no shares had been acquired under this program.
Business development
NHYDY's President and CEO, Eivind Kallevik pointed out in the presentation to analysts that:
Our market is, whether we like it or not, in an environment where we are heavily influenced by external factors, all of which we cannot control. So we really can't control what happens in the world around us. But for me, it is paramount that we understand what's going on around us so that we can adapt swiftly
Norsk Hydro's electric energy prices and commodity prices (Norsk Hydro Q2 Financial Results Presentation)
To make aluminum, you need alumina, which is the intermediary commodity made from bauxite ore. To do this and also produce the finished product aluminum, you need a lot of electricity. Norway has been blessed with plenty of cheap hydropower.
But it was certainly not cheap in 2022 when Europe faced massive shortages of gas. Norway assisted by selling electricity to the E.U., which caused a huge increase in electricity costs for both industry and private consumption.
This situation has normalized somewhat.
Platts PAX development is the average price set by Platts for alumina. Since Q1 of this year, the price shot up from $367 to $433 per ton. One reason for this spike has been Alcoa's ( AA ) decision to curtail the production of alumina from Kwinana in Australia. This refinery has an annual production capacity of up to 2.2 million tons and was in 2023 running at 80% capacity.
As we stated earlier, the aluminum price and cost of the material required to make it is expected to stay elevated for some time.
NHYDY actively hedges both currencies and commodity prices.
Risk to Thesis and Conclusion
We chose to use as the main picture for this article, bales of aluminum scrap for recycling.
This is a part of the business that NHYDY has invested heavily in. However, at this moment they are facing pressure from low recycling margins. There is a low availability of aluminum scrap resulting in several recyclers running on reduced capacity.
Our concern is that NHYDY potentially is putting too much focus on ESG at the cost of reduced profitability. We did notice that when they talked about stakeholders, of which there are many, shareholders came last. Perhaps that is just a coincidence.
There is a market for selling "green" aluminum at a premium price to brands like the large German luxury car manufacturers.
When we look at the positive trend in the slight improvements in the adjusted EPS, it also begs us to ask the question if NHYDY's share price could be bottoming out at present levels.
When we compare the share price with two other large peers, one in the U.S. and one in China, we can see that NHYDY's share price is the one that has done the worst.
Norsk Hydro share price versus Alcoa and Chalco (Yahoo Finance)
Overall, we conclude that NHYDY should be able to continue to grow adjusted EPS at low single-digit clips in the next few quarters.
As such, we upgrade it to a Hold stance.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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