Investment Highlights

• We cut our net profit forecast by 21% for FY19F and 7% each for FY20–21F, reduce our FV by 7% to RM3.83 (from RM4.15 previously) but maintain HOLD on Press Metal. Our new FV is based on 18x FY21 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.

• The earnings downgrade is to reflect a downward revision on aluminium price assumptions for FY19–21F largely due to the persistent trade tensions between the US and China, coupled with the projection that aluminium production will outstrip consumption in China over the medium term.

• Press Metal’s 1HFY19 core net profit missed expectations, coming in at only 31% and 33% of our full-year forecast and full-year consensus estimates respectively. We believe the variance against our forecast came largely from a lower aluminium ASP realised.

• 1HFY19 core net profit dropped by 30% YoY underpinned by: (1) lower aluminium selling prices; and (2) higher input cost of alumina (of which forward prices averaged at US$412/tonne in 2QFY19 vs. US$405/tonne in 1QFY19.

• We trim our FY19–21F aluminium average selling price (ASP) per tonne assumption by 4% to US$1,800, US$1,950 and US$2,000 respectively (from US$1,870–2,050/tonne previously). We also reduce our average alumina cost assumption to US$390–430/tonne (from US$400– 450/tonne) backed by a moderation in alumina forward prices with the full resumption of Hydro Alurnote’s operations recently.

• 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’s valuations are at a premium vs. its global peers which means the upside to its share price may be capped.

• However, this is mitigated by Press Metal’s recent signing of a 15-year power purchase agreement (PPA) with Sarawak Energy Bhd for the supply of 500MW of electricity, enabling it to power an additional annual aluminium smelting capacity of 320K tonnes. This will boost its overall smelting capacity by 42% to 1.08 mil tonnes by 2021 from 760K tonnes currently.

Source: AmInvest Research - 21 Aug 2019