Investment Highlights

• We maintain our FY19–20F net profit forecasts, but raise FY21F earnings forecast by 15% to reflect earnings accretion from an expansion backed by the latest power deal with Sarawak Energy. We raise our FV by 15% to RM4.15 (from RM3.60 previously) as we roll forward our base year to FY21F from FY20F. Our new FV is based on 18x FY21F 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. Maintain HOLD.

• Press Metal yesterday announced that it has signed a 15- year power purchase agreement (PPA) with Sarawak Energy for the supply of 500MW of electricity to its proposed third aluminum smelter plant in Samalaju. According to the company, the 500MW drawdown is expected to be fully commenced on 2021.

• The 500MW electricity will power an additional annual aluminium smelting capacity of 320K tonnes, boosting Press Metal’s overall smelting capacity by 42% to 1.08 mil tonnes from 760K tonnes currently.

• We believe that the capex for the new plant is expected to be around RM1.5bil, similar to the amount spent on the second plant in Samalaju (500MW for a smelting capacity of 320K tonnes per annum).

• We understand that the tariff rate for the new PPA (with an annual escalation) is competitive and is slightly higher than the rate it is currently paying.

• We remain cautious on Press Metal as: (1) earnings outlook for aluminum smelters globally is still cloudy due to the weak aluminum 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 - 1 Aug 2019