Investment Highlights

• We cut our FY20–22F net profit forecasts by 29%, 12% and 13% respectively largely to reflect weaker aluminium prices. We also reduce our FV by 29% to RM3.03 based on 15x revised FY21F EPS (from RM4.24 based on 18x FY21F EPS previously). The cut in our multiple is to reflect a higher market risk premium as the Covid-19 pandemic cripples the global economy. At 15x, the multiple is also in line with our target P/E for the FBM KLCI. It is still at a substantial premium to the 8x average forward P/E of key global aluminium smelters to reflect Press Metal’s favourable cost structure with the bulk of its energy costs (from hydro power) locked in at very competitive rates over the long term. Maintain HOLD.

• We cut our assumptions for average aluminium selling price per tonne in FY20–22F by 11%, 4% and 4% to US$1,600, US$1,800 and US$1,850 respectively (from US$1,800, US$1,930 and US$1,930 previously). YTD, aluminium prices have averaged at US$1,710/tonne and they last traded at US$1,482/tonne.

• On the demand side, key consumers of aluminium such as the automotive, construction and aviation industries have been hard hit by the Covid-19 pandemic. For instance, the passenger car sales in China plunged 92% YoY in the first half of February while Airbus was reported to have slashed its production of the A320 by 40%. Across the US and Europe, automakers were also reported to have temporarily shut down, including Detroit’s Big Three, i.e. Ford, General Motors and Fiat. Also, various supply chain issues have disrupted the production of consumer goods earmarked for the coming holiday season, resulting in weaker demand for aluminium.

• On the supply side, production in China still rose by 2.4% YoY in Jan–Feb 2020 as smelters generally do not shut down operations (despite weak demand) as it is costly and time consuming to restart them. China produces and consumes more than half of global aluminium production annually.

• We also cut our assumptions for average alumina cost per tonne in FY20-22F to US$270-US$300, from US$350- US$380. Alumina prices have also eased and were last traded at US$242/tonne from US$280/tonne in early Jan 2020, as the supply of aluminium in China gradually normalises with the lifting of the lockdowns since end-Mar 2020.

• 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. This will enable it to power an additional annual aluminium smelting capacity of 320K tonnes and boost its overall smelting capacity by 42% to 1.08mil tonnes by 2021 from 760K tonnes currently.

Source: AmInvest Research - 8 Apr 2020