Investment Highlights

• We maintain our HOLD call but cut our net profit forecasts for FY19F by 7%, and FY20–21F by 2% largely to reflect the general cost escalation. Consequently, we also reduce our FV by 2% to RM3.60 (from RM3.66) based on 18.5x revised 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 aluminium 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.

• We came away from an analyst briefing yesterday feeling cautious on the company’s outlook largely due to the earnings risk from the volatility of aluminium price against the backdrop of US-China trade tensions. However, this will be mitigated by the strength of the USD against the MYR which is a net positive to exporters like Press Metal (Exhibit 1).

• Press Metal has locked in 80–85% of its aluminium production in FY19F at an average of US$1,900– 2,000/tonne (out of this, it has only managed to hedge 15– 20% at slightly above US$2,000/tonne). This is consistent with our assumption of US$1,870–2,050/tonne in FY19– 21F. We are cautious on the outlook for aluminium prices largely due to the higher projected production growth of 8% vs. projected consumption growth of 5% in China in 2019.

• The company is hopeful that the price of input alumina will soften due to the full resumption of Hydro Alurnote refinery plant in Brazil. However, we maintain our alumina price forecast at US$400–450/tonne on the back of the ongoing supply shortage in the global alumina production. While the full resumption of the Brazilian refiner’s operation will add 3mil tonnes to the global alumina supply by August this year, this could be more than offset by a 3.2mil tonne deficit with the shutdown of Xinfa’s alumina refineries in China.

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

Source: AmInvest Research - 30 May 2019