Investment Highlights

• We cut our FY19–21F net profit forecast by 8% each year, reduce our FV by 7% to RM3.66 (from RM3.95 previously) but maintain a HOLD recommendation on Press Metal. The RM3.66 FV is based on 18.5x FD FY20F 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 downgrade is to reflect the downward revision on aluminum price for FY19–21F largely due to worse-than-expected trade tension between the US and China, coupled with the projection that aluminum production will outstrip consumption in China.

• Press Metal’s 1QFY19 core net profit missed expectations, coming in at only 14% and 15% of our full-year forecast and full-year consensus estimates respectively. We believe the variance against our forecast came largely from a lower aluminum ASP realized vs. our assumption.

• 1QFY19 core net profit decreased by 24% YoY underpinned by: (1) lower selling price realized due to the ongoing US-China trade tension; and (2) higher input cost which is alumina cost on the back of the supply shortage resulting from Hydro Alurnote’s half-curtailment on its alumina production since March 2018 (Exhibit 2).

• We trim our FY19–21F aluminum average selling price (ASP) per tonne assumption by 2% to US$1,870, US$1,970 and US$2,050 respectively (from US$1,900-2,100/tonne previously) underpinned by the uncertainties on the aluminum price due to the prolonged trade tension between the US and China. However, we are keeping our alumina ASP assumption of US$400–450/tonne respectively.

• Press Metal also announced a dividend of RM0.0125 for 1QFY19 which is in line with our full-year forecast of 5 sen for FY19–21F.

• We are cautious on the outlook for aluminum prices in 2019. Industry experts project aluminum consumption in China to grow by a healthy 5% to 38.3mil tonnes in 2019 largely backed by its growing automotive and aircraft manufacturing industries. However, during the same period, aluminum production in China is projected to outstrip consumption by a faster rate of 8% to 40mil tonnes. China is the largest producer and consumer of aluminum in the world.

Source: AmInvest Research - 28 May 2019