Investment Highlights

• We reduce our FY20–21F net profit forecasts by 8% and 4% respectively. We trim our FV by 4% to RM3.69 (from 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. Maintain HOLD.

• Press Metal is subscribing to a 25% stake in PT Bintan Alumina Indonesia (PT BAI) for US$80.2mil (RM331.4mil) cash. PT BAI is currently constructing an aluminium oxide refinery in Galang Batang, Riau Islands Province, Indonesia, with an initial capacity of 1mil tonnes. It has plans to expand its capacity another 1mil tonnes.

• Press Metal is effectively moving upstream with the latest investment. Typically, alumina input makes up 35–40% of Press Metal’s production cost. Upon commissioning in 2H20, we understand that Press Metal may source as much as 1mil tonnes of alumina from PT BAI. This will make up close to half of its annual requirement of 2.06mil tonnes. Apart from enhanced security of feedstock supply, we understand that the new arrangement could also result in better alumina pricing, resulting in improved margins.

• The investment will increase Press Metal’s net debt and gearing of RM3.4bil and 0.84x at present to RM3.73bil and 0.92x respectively. These are still relatively manageable given the strong cash generative nature of Press Metal’s core business.

• Our earnings downgrade is to reflect higher interest expense from the investment. We are also taking the opportunity to factor in the proposed 1% state sales tax on the exports of aluminium products effective 1 Jan 2020.

• 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.

• While we are positive on the latest development, we remain cautious on Press Metal’s overall outlook due to: (1) the weak prospects for aluminium price and the high cost of input alumina, resulting in margin squeeze; and (2) the company’s valuations which are at a premium vs. its global peers. This means the upside to its share price may be capped.

• However, this could be 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 - 18 Nov 2019