Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Tue, 17 Nov 2020, 5:57 PM


Press Metal - Next Growth Cycle Around the Corner

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Next Growth Cycle Around the Corner

We believe Press Metal is prepped for a 2-year core EPS CAGR of 38% in FY20-21E. This growth will come from the new aluminium production capacity commencing in October 2020, maiden earnings contribution from its investment in PT Bintan Alumina and a weak RM. The resumption of alumina supply and hence lower production cost provides a near-term catalyst. We raise our target price (TP) to RM5.35 based on a higher 2020E PER target of 33x and upgrade our call to BUY from Hold.

Staged for Earnings Growth in 2020E-21E

The construction of Press Metal’s third aluminium smelting plant with a production capacity of 320,000MT started in August 2019. The new plant is expected to come online in October 2020 and lead to a 42% increase in smelting capacity.

Alumina Price Recovery

We believe Press Metal’s operating margin will improve on the back of lower alumina prices. Alumina prices fell to US$290-300/MT after peaking at US$638/MT in September 2018 due to the disruption in global alumina supply. We expect alumina prices to remain at 16-17% of LME aluminium prices as alumina supply recovers with the resumption of 50% of Alunorte’s production at Alunorte and new capacity. In addition, Press Metal’s acquisition of PT Bintan Alumina Indonesia (PT BAI) should ensure sustainable alumina supply and at favourable rates in the future.

Balance Sheet Remains Healthy

Recently, S&P Global Ratings downgraded Press Metal’s rating to “B+” from “BB-“, while Moody revised the group’s outlook to Negative. The rating agencies are concerned about the group’s financial health on the back of its debt-funded expansion plan. However, we believe the group’s leverage is still manageable. Based on our calculation, its net gearing will increase to 1.0x from 0.8x (as at end-June 2019) after accounting for the expansion capital expenditure and the PT BAI acquisition. In addition, we expect its operating cash flow to remain healthy and sufficient to support its day-today operations.

Upgrade to BUY With a Higher TP of RM5.35

We cut our 2019 EPS forecast by 4%, but lift 2020-21E by 3-5% to reflect a better operating profit margin and weaker RM/US$ assumption. Given the strong 2-year EPS CAGR of 38% in 2020-21E post our earnings revision, we upgrade our call on Press Metal to BUY with a higher TP of RM5.35, based on a higher 2020E PER of 33x (previously 31x).

Source: Affin Hwang Research - 18 Oct 2019

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