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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Thu, 21 Nov 2019, 10:44 AM

 

Press Metal Aluminium - Short-term Pain, Long-term Gain

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PMETAL’s 2Q19 CNP came in below expectations at RM107m (-39% YoY; -3% QoQ), bringing 1H19 CNP to RM218m (-31% YoY), forming only 34% of consensus full-year estimate and 32% of ours due to lower-than-expected aluminium prices. An interim dividend of 1.25 sen was announced, as expected. Cut FY19E CNP by 23% to RM526m while maintaining FY20E CNP of RM849m. Reiterate OUTPERFORM with an unchanged TP of RM5.50.

Below expectations. Press Metal Aluminium Holdings Berhad (PMETAL)’s 2Q19 Core Net Profit (CNP*) came in below expectations at RM107m (-39% YoY; -3% QoQ) owing to lower-than-expected aluminium prices. This brought 1H19 CNP to RM218m (-31% YoY), accounting for only 34% of consensus full-year estimate and 32% of ours. An interim dividend of 1.25 sen was announced, in line with our expectation.

Higher raw material cost. YoY, 1H19 CNP fell 31% as the average aluminium price declined 17% to c.USD1,829/MT, exacerbated by an estimated 15% increase in the average alumina price to c.USD380/MT. As a result, PBT margin eroded by 3.0 ppts to 6.5%. QoQ, a 4% drop in the average aluminium price and an estimated 5% rise in the average alumina price sent PBT tumbling 21%. However, this was partially offset by a lower effective tax rate of 3.5% (vs. 7.9% in 1Q19) due to tax incentives granted to PMETAL’s subsidiaries. As a result, CNP only inched down by 3%.

Looking ahead to FY20-21. While alumina prices have normalised to c.USD300-305/MT in mid-July from this year’s high of c.USD417/MT, we gather that shipments of high-cost alumina should spill over to the greater part of 3Q19. Therefore, the benefit of the drop in alumina prices should only be fully felt from 4Q19 onwards. Looking ahead, we expect the group to register sturdy earnings growth in FY20-21 on the back of 42% smelting capacity expansion, cheaper alumina prices and rising sales composition of high-value products (i.e. billet and wire rod).

Cut FY19E CNP by 23% to RM526m as we lower our aluminium price assumption from USD2,000/MT to USD1,920/MT; while maintaining FY20E CNP of RM849m with the third aluminium smelting plant (320k MT or 42% increase in capacity) commencing production in 4Q20 and lower alumina prices substantially easing cost pressure next year.

Reiterate OUTPERFORM with an unchanged Target Price of RM5.50 based on FY20E PER of 25.4x. The Fwd. PER implies +0.5SD, justified by sturdy earnings growth prospects in FY21 (+24% CNP growth) on the back of capacity expansion. Independent of the expansion, PMETAL’s operating outlook is already looking positive with increasing contribution from value-added products and a series of upstream acquisitions in the pipeline.

Risks to our call include a sharp fall in aluminium prices, an escalation of raw material prices as well as major plant disruptions/closure.

Source: Kenanga Research - 21 Aug 2019

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