Investment Highlights

• We cut our FY18-20F net profit forecasts by 12%, 24% and 25% respectively, lower our FV by 8% to RM3.77 (from RM4.10), but maintain our HOLD call on Press Metal Aluminium Holdings (Press Metal). Our new FV is based on 18.5x revised FD FY19F EPS, which is: (1) in line with our forward target P/E for FBM KLCI; and (2) at a premium to the 10x average forward P/E of key global aluminium smelters to reflect Press Metal’s favourable cost structure with the bulk of its energy cost (from hydro power) being locked in at very competitive rates over the long term.

• The earnings downgrade is to reflect lower average selling price (ASP) assumptions for aluminium, but higher assumptions for costs of input alumina, resulting in margin compression.

• We now forecast FY18-20F aluminium ASP to be 5–19% lower at US$1,900–2,100/tonne from US$2,050–2,500/tonne we assumed previously underpinned by a higher production rate vs. consumption rate. Industry experts project aluminium consumption in China, the world’s largest producer and consumer of aluminium, to grow by a healthy 5% to 38.3mil tonnes in 2019 (from 36.5mil tonnes estimated for 2018) largely backed by growing automotive and aircraft manufacturing industries. However, during the same period, aluminium production in China is anticipated to rise by a faster rate of 8% to 40mil tonnes (from 37mil tonnes estimated for 2018).

• Meanwhile, we now project average FY18-20F alumina cost to be 6–18% higher at US$450–550/tonne from US$380–520/tonne we assumed previously. We expect alumina prices to be buoyed by the shortages arising from the full curtailment (as compared with only a 50% cut previously) of Hydro Alunorte’s operations in Brazil, the largest alumina refinery in the world. Typically, alumina makes up 30–35% of total aluminium production cost.

• Alumina price as a percentage of aluminium price provides a good indication of the profitability of aluminium smelters. Historically, smelters struggled to turn in a profit when alumina price stood at 19% and above of aluminium price (Exhibit 2).

• Our revised aluminium and alumina price assumptions for Press Metal point to an alumina price of 23–26% of aluminium price in FY18-20F vs. 16–20% we assumed previously. However, we believe Press Metal will remain profitable largely due to its favourable cost structure with its energy cost being locked in at very competitive rates.

• We remain cautious on Press Metal as: (1) earnings outlook for aluminium smelters globally is cloudy due to the weak aluminium price and high cost of input alumina, resulting in margin squeeze; and (2) the company valuation is at a premium vs. its global peers which means the upside to its share price may be capped.

Source: AmInvest Research - 14 Jan 2019