Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM3.57 based on 18x 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.

• We came away from an analyst briefing feeling cautious on the company’s outlook largely due to the earnings risk from the volatility of aluminium prices against a backdrop of persistent trade tensions between the US and China. This, to a certain extent, is mitigated by a more benign cost of input alumina, at least for now, with an improved global supply outlook.

• Press Metal guided for more stable quarters ahead backed by improving margins on softening of alumina prices. The company is hoping that alumina prices will drop further to 16–17% of the aluminium price (from the current 21%).

• The company also said that that it has locked in 10–15% of its aluminium production at US$1,900–2,000/tonne (vs. the spot prices of US$1,750–1,800/tonne currently). Based on this, we believe our average our aluminium price assumption of US$1,750–1,930/tonne for FY19–21F is still valid. To recap, 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.

• Press Metal guided for prices of its key input alumina to ease further over the immediate term following the full resumption of the operation of Hydro Alunorte in Brazil, the largest alumina refinery in the world. This translates to an additional 3mil tonnes of supply which is equivalent to 5% of global output currently.

• However, we are mindful of a 3.2mil-tonne shortfall following the recent shutdown of Xinfa’s alumina refineries in China. Also, there could be more production cuts in China going forward as the country tightens its environmental policy further. As such, we are keeping our average alumina price assumption at US$350– US$380/tonne.
   
• Meanwhile, the company is still in active discussions with the Sarawak state government following the imposition of a 1% state sales tax (SST) over aluminium smelting products in the state’s 2020 budget. Press Metal is proposing alternative measures to the state government such as a “profit sharing” arrangement. The company is striving to get across to the state government the message that the new tax is highly detrimental to potential new investments in Sarawak. To be prudent, we have already reflected the new tax in forecasts.
   
• 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 - 2 Dec 2019