Investment Highlights

• We maintain our HOLD call and forecasts, but raise our FV by 20% to RM3.94 based on 18x FY22F EPS (from RM3.28 based on 15x FY22F EPS previously). This is to reflect the recent upgrade in our multiple for FBM KLCI to 18x from 15x (as strong domestic liquidity has offset the selling by foreign investors). At 18x, our target P/E for Press Metal is still at a substantial premium to the 10x average forward P/E of key global aluminium smelters. We believe this could be justified by Press Metal’s favourable cost structure with the bulk of its energy costs (from hydropower) locked in at very competitive rates over the long term.

• Press Metal’s 1QFY20 core net profit of RM102.6mil (adjusted for PPE written off predominantly) met our expectations at 25% of our full-year forecast but missed market expectations at only 17% of the full-year consensus estimates.

• Its 1QFY20 core net profit dropped 27% YoY mainly due to a 9% fall in aluminium’s average selling price of US$1,713/tonne (vs. US$1,883/tonne a year ago). This was partially mitigated by a 30% fall in average cost of input of alumina at US$283/tonne (vs. US$406/tonne a year ago).

• YTD, aluminium prices have averaged at US$1,631/tonne and it was last traded at US$1,569/tonne, whereas alumina prices have averaged at US$265/tonne and it was last traded at US$252/tonne.

• We maintain our assumptions for average aluminium selling price per tonne for FY20–22F at US$1,600, US$1,700 and US$1,800 respectively. We do not expect a V-shaped recovery in global aluminium prices over the next 12–18 months as the Covid-19 pandemic has significantly damaged the aluminium consuming sectors, i.e. automotive/aviation and construction (with a combined market share of circa 50%) at both their demand side (reduced sales and cancelled orders) and supply side (plant shutdowns) due to the lockdown and travel restrictions.

• 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 (alumina prices have rebounded from recent lows), 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.

Source: AmInvest Research - 5 Jun 2020