• We recently visited the smelting plant of Press Metal Aluminium Berhad (PMETAL) to gain a more comprehensive insight into the operational activities of the company.

• We believe Press Metal distinguishes itself through: - i) its competitive edge in structural costs, thanks to secure access to low-cost hydro power vis long-term PPAs, ii) strong alumina supply chains facilitated by holdings stakes in Japan Alumina Associate (40%) and PT Bintan (25%), and iii) its appeal as a clean energy source for green investments.

• Overall, we hold an optimistic outlook for the aluminum market, driven by the current low inventory levels resulting from supply cuts in Europe and the ban on Russia's production. Furthermore, global demand for aluminum is expected to gradually increase, primarily fueled by the growing adoption of electric vehicles (EVs) and the increased use of aluminum in various industries.

• Maintain a BUY call on the stock with unchanged TP of RM5.43. Our valuation is based on average 3-year PER of 33.1x, pegged to FY24F EPS of 16.4sen.

Commendable Utilisation Rate in Samalaju Plant

Press Metal's smelting facilities in Samalaju Industrial Park consist of three phases: Phase 1 (P1), Phase 2 (P2), and Phase 3 (P3), with a combined total capacity of 900,000 metric tons (MT). These facilities are currently operating at an impressive efficiency rate exceeding 95%. Note that the plant has a total of 900 smelting pots in Samalaju Industrial Park. Molten aluminium production happens at the smelters, and this molten aluminium is then transported to the casting house for casting into P1020 (pure aluminium ingots) and various other valueadded products (VAPs). Apart from pure aluminium ingots, there is a growing demand for VAPs, with a 10% QoQ volume increase, despite challenging market conditions. The most significant demand increase was observed for the A356 aluminium alloy, followed by wire rods. Moving into 4Q2023, the group is planning to increase its wire rod capacity by an additional 48,000 MT.

A Strong ESG Profile

Aluminium is recognized for its environmental sustainability as it can be recycled to produce identical items. Moreover, aluminium plays a pivotal role in ESG-aligned sectors, particularly in electric vehicles and renewable energy, such as solar panels. Notably, PMETAL enjoys the advantage of longterm power supply from Sarawak Energy Berhad (SEB) with favourable rates from the Bakun Dam, granting access to hydroelectric power and enhancing its status as a low-carbon aluminium manufacturer.

Social responsibility wise, PMETAL's workforce is primarily comprised of local Sarawakian employees, accounting for about 80% of the workforce at its Samalaju Industrial Park and Mukah plants. The remaining 20% consists of workers from China, Myanmar, and Indonesia. These workers are provided accommodations in hostels with convenient bus services, all located within a 10-minute drive from the plants.

Promising Growth Despite Ongoing Challenges

The lacklustre demand has exerted pressure on the aluminium spot price, leading to a decrease of 17.2% YoY in 9M2023, dropping to USD2,313 compared to USD2,759 in 9M2022. This decline can be attributed to a variety of factors and influences that have affected market conditions, such as the increasing inflationary trend with many central banks around the world have resorted to tightening monetary policies in order to restore price stability, thus affecting demand. Regarding raw material prices, specifically alumina, there was a shortage in supply due to lower bauxite grade, disruptions in gas supply, and refinery maintenance, particularly in 1H2023. Nevertheless, we believe the prospects for aluminium should be balanced by tight supply, which will likely push the price even higher. The closure of smelters relying on fossil fuels, particularly coal, due to mounting environmental concerns, coupled with Western sanctions against Russian aluminium products, is poised to impose constraints on the supply chain, thereby keeping aluminium prices strong.

Maintain a BUY call, at unchanged TP of RM5.43

We make no changes on the FY23-25F earnings assumption. Maintain a BUY call on the stock with unchanged TP of RM5.43. Our valuation is based on average 3-year PER of 33.1x, pegged to FY24F EPS of 16.4sen.

Source: BIMB Securities Research - 23 Oct 2023