Investment Highlights

• We cut our FY20F net profit forecast by 9%, but maintain our FV of RM4.24 based on 18x FY21 EPS which is at a premium to an average forward P/E of 10x of key global aluminium smelters. This is 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 earnings downgrade is to reflect a weaker aluminium average selling price (ASP) in FY20F. Maintain HOLD.

• Press Metal’s FY19 core net profit of RM471.0mil met our forecast and consensus estimates.

• Its FY19 core net profit dropped 24% YoY mainly due to a weaker aluminium average selling price (ASP) of US$1,800/tonne (vs. US$2,100 a year ago). This was partially mitigated by a lower average alumina input cost of US$340/tonne (vs. US$460/tonne a year ago). YTD, aluminium prices have averaged at US$1,762/tonne and they last traded at US$1,699/tonne.

• We reduce our aluminium ASP assumption by 4% to US$1,800/tonne (from RM1,880/tonne) largely to reflect the subdued commodity prices on the back of the global economic slowdown on the Covid-19 outbreak. We maintain our aluminium ASP assumption of US$1,930/tonne in FY21-22F.

• Key highlights from Press Metal’s analyst briefing this morning are:

1) The Sarawak state government has yet to impose the proposed 1% sales tax on aluminium products. Press Metal is expecting a decision from the state government in coming months. Our forecasts have already factored in the sales tax that have effectively eroded its earnings by about 7%; and

2) The construction of Samalaju Phase 3 smelter has not been materially affected by the Covid-19 outbreak, i.e. only a delay of 2–4 weeks of which the contractors could comfortably catch up between now and the commercial operation date (COD) in Oct 2020. We understand that a number of construction workers from China are currently undergoing the required 14-day quarantine in a specific location in Peninsular Malaysia before heading to Sarawak.

• 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 - 25 Feb 2020