• BUY, new TP of MYR5.71 from MYR6.00, 19% upside with c.1% FY23F yield. Global aluminium production rose by 9.6% MoM (+0.3% YoY) in March, after a seasonally low production month in February. We cut net profit forecasts for Press Metal by 6-9% in view of the normalised aluminium spot prices, but maintain BUY due to the still-low London Metal Exchange (LME) warehouse aluminium inventory, scarcity of low carbon-producing aluminium smelters in ASEAN – which would benefit from the “green push” from EVs – and global demand shift towards Asian smelters amid production disruptions in Europe.

• Lukewarm outlook. Western European smelters are unlikely to see a comeback in the near term due to the volatile aluminium prices, inconsistent power supply, and the strenuous process of restarting the plant. This shortfall is insignificant, due to their minimal contribution (c.4%) to global supply, being cushioned by the production recovery in China. Southwest China smelters have resumed operations, while Yunnan smelters should be running again next month. This expected capacity from China will likely lead to an aluminium surplus for 2024- 2025F, should the power-rationing policy in Europe be relaxed. The consumption of industrial metals in China – the world’s biggest consumer and producer of aluminium – should remain subdued, and the MoM slowdown in construction activity there may further exacerbate concerns over the demand for metal. Note that RHB economists are expecting a further slowdown in China’s economic activity, but they also think that a recovery in the US’ GDP growth in 2H may support the outlook for global commodity prices.

• 1Q23 results preview. The LME aluminium price averaged USD2,400/tonne in 1Q23 (1Q22: USD3,254/tonne). The prices per tonne of carbon anode and alumina (both raw materials) were at CNY6,398 (1Q22: CNY5,136) and USD356 (1Q22: USD411). We expect PMAH’s 1Q23 topline’s YoY growth to soften 5-7% while core earnings should remained flattish, supported by easing alumina and carbon anode prices. Nevertheless, the global demand for aluminium is expected to grow by 1-3% YoY over FY23-25F, driven by gradual EV penetration and the transition to aluminium usage in all vehicles. This, on top of the still-low aluminium inventory in LME warehouses, should continue to underpin the positive outlook for aluminium demand ahead.

• We trim FY23-25F earnings by 6-9% in view of the normalised aluminium spot prices. Our sensitivity analysis shows that every USD50 change in the aluminium price would impact PMAH’s earnings by c.4%, and every 5% change in the USD/MYR rate would impact its net profit by 4.2%. Our new TP implies 27x 2023F P/E, in line with its historical mean. Key downside risks include a plunge in aluminium prices, sharp weakening of USD, higher raw material prices and slowdown in global economic growth which would cut primary aluminium demand.

• ESG framework update. With greater focus on the E pillar due to climate change, we now have a weightage of 50% for the E pillar, followed by 25% each for the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 22 May 2023