Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM3.83 for Press Metal. Our FV is based on 18x FY21EPS 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 earning risk from the volatility of aluminium prices against the persistent trade tension between the US and China, coupled with uncertainties of the global supply-demand dynamic of alumina.

• Press Metal guided that the outlook for the next quarters is more stable as it believes its margin will improve, backed by the softening of alumina prices recently. The company said it will be at a more comfortable level if the alumina price drops further to 16–17% of the aluminium price (from the current 20% level of alumina price against the aluminium price).

• The company believes that the aluminium price will remain at about US$1,800–US$1,850/tonne going forward and locking the price of its aluminium production will be challenging due to the price uncertainty in the market. This is in line with our aluminium price assumption of US$1,800–US$2,000/tonne for FY19–21F. We are cautious on the outlook for aluminium prices largely due to the higher projected production growth of 6–7% vs. projected consumption growth of 5% in China in 2019.

• They also believe that alumina prices will soften further on the back of the full resumption of Hydro Alurnote refinery’s operation in early August which contributed an additional 3mil tonnes of alumina supply in the global market. However, we maintain our alumina price forecast at US$390–US$430/tonne on the back of the ongoing supply shortage in the global alumina production. The resumption of the Brazilian refinery’s operation could be more than offset by a 3.2mil tonne deficit with the shutdown of Xinfa’s alumina refineries in China. Adding to that, we believe there will be more production cuts in China moving forward, underpinned by the country’s environmental policy.

Source: AmInvest Research - 22 Aug 2019