Investment Highlights

• We maintain our FY19–20F net profit forecasts, but raise our FY21F forecast by 19%. We also revise up our FV by 19% to RM4.24 (from RM3.57 previously) based on 18x FY21 EPS, which is: (1) in line with the FBM KLCI’s historical 5-year average P/E; and (2) at a premium to an average forward P/E of 10x 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.

• To recap, Press Metal is subscribing to a 25% stake in alumina producer 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 by another 1mil tonnes.

• As we anticipate the deal to be concluded soon, we are factoring in earnings accretion from FY21F from Press Metal’s investment in PT BAI. Apart from share of profits equity accounted from PT BAI, we also expect some savings arising from Press Metal sourcing alumina from PT BAI at competitive rates.

• 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 gather 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.

• Nonetheless, 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 (which 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 - 10 Dec 2019