Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM3.83 based on 18x FY21EPS, which is 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 Sarawak state government yesterday proposed a 1% State Sales Tax (SST) on the exports of aluminium products starting from January 2020, as part of its plan to increase the state government revenue.

• Based on our estimates, the new tax will cost Press Metal RM64mil and RM89mil in FY20–21F, eroding our FY20–21F net profit forecasts by 6–8% and lowering our FV by about 7% to RM3.54 (based on the same 18x earnings multiple).

• We are keeping our earnings forecasts for now as we believe the company is in the midst of seeking clarification from the state government on the matter.

• Meanwhile, we maintain our assumption on: (1) aluminium average selling price (ASP) of US$1,800-US$2,000/tonne for FY19–21F on the back of higher projected production growth of 6–7% vs. projected consumption growth of 5% in China in 2019 and; (2) alumina price of US$390– US$430/tonne backed by the prevailing supply shortage in global alumina production.

• We remain cautious on Press Metal as: (1) earnings outlook for aluminum 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 1.08mil tonnes by 2021 from 760K tonnes currently.

Source: AmInvest Research - 5 Nov 2019