Investment Highlights

• We raise our FY19–21F net profit forecast by 2–9% and maintain a HOLD recommendation on Press Metal with a higher FV of RM3.95 (from 3.80 previously). The RM3.95 FV is based on 18.5x FD FY19F EPS which is: (1) in line with our forward target P/E for the FBM KLCI; and (2) at a premium to the 10x average forward P/E of key global aluminum smelters to reflect Press Metal’s favourable cost structure with the bulk of its energy cost (from hydro power) locked in at very competitive rates over the long term.

• The earnings upgrade is to reflect a downward revision in our price assumption for alumina (which is the input for aluminium), translating to improved margins for Press Metal. We now project the alumina price for FY19–21F at US$400–450/tonne (from US$450–500/tonne previously) underpinned by the additional alumina supply from Hydro Alurnote refinery in Brazil (3mil tonnes annually assuming the lifting of a production curb) and Al-Taweelah refinery in the UAE (a new plant with an annual capacity of 2mil tonnes).

• We are keeping our aluminium per tonne price assumptions of US$1,900, US$2,000 and US$2,100 for FY19–21F respectively.

• Global alumina supply could see additional output as there is a strong possibility that the Brazilian Federal Court will rule in favour of a petition submitted by Norsk Hydro, the world’s largest alumina produce. Norsk Hydro has requested that the court lift a production curb on 3mil tonnes, translating to half of its annually capacity of 6mil at its Hydro Alurnote alumina refinery.

• The Hydro Alurnote refinery in Barcarena, Brazil has been placed under half curtailment since March 2018 on suspicion of toxic waste overflowing from a holding basin. Following an investigation, the local environmental authorities concluded that there was no contamination.

• The half curtailment resulted in a global alumina supply deficit of 3mil tonnes annually, helping to drive alumina prices up to as high as US$650/tonne in end-2018, from about US$400/tonne prior to the incident (Exhibit 1).

• The high alumina prices also drove Alcoa, the biggest aluminum producer in the world, into a net loss of US$199mil in 1QFY19 (reported last week). However, Press Metal is cushioned by its low cost structure underpinned by cheap hydro power cost.

Source: AmInvest Research - 25 Apr 2019