Investment Highlights

• We cut our FY19–21F net profit forecasts by 18%, 2% and 3% respectively, reduce our FV by 3% to RM3.57 (from RM3.69 previously) but maintain HOLD on Press Metal. Our new FV is based on 18x revised FY21 EPS, 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.

• Press Metal’s 9MFY19 core net profit missed expectations, coming in at only 60% and 63% of our full-year forecast and full-year consensus estimates respectively. We believe the variance against our forecast came largely from a lower aluminium average selling price (ASP) realised.

• 9MFY19 core net profit dropped by 28% YoY mainly due to the margin compression arising from a weak aluminium ASP (at US$1,816/tonne vs US$2,100 a year ago). However, this was partially offset by the softening input cost of alumina (averaging at US$380/tonne in 3QFY19 vs. US$407/tonne in 2QFY19).

• We trim our FY19–21F aluminium ASP per tonne assumption by 3% to US$1,750–US$1,930 respectively (from US$1,800–2,000/tonne previously) to reflect the weak global demand for aluminium against a backdrop of the USChina trade war, coupled with the projection that aluminum will outstrip consumption in China over the medium term.

• We also reduce our average alumina cost assumption to US$350–380/tonne (from US$390–430/tonne) backed by a moderation in alumina forward prices with the recent full resumption of the operation of Hydro Alunorte in Brazil, the largest alumina producer in the world.

• 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 - 29 Nov 2019