Investment Highlights

• We cut our FY21F net profit forecast by 5% while keeping our FY20F and FY22F estimates, but maintain our FV of RM3.94 based on 18x FY22 EPS. While the 18x multiple is in line with our target P/E for the FBM KLCI, it is at a substantial premium to the 10x average forward P/E of key global aluminium smelters. This is 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.

• The earnings downgrade is to reflect a slight delay in its Samalaju Phase 3 expansion project. We understand that the project has been pushed back by 2–3 months with a target of commissioning by January 2021 (from October 2020) due to the lockdown and travel restrictions of engineers and workers involved in the machinery installation. With that, we now assume effective capacity from the Phase 3 expansion of only 288K tonnes per annum in FY21F (from 320K tonnes previously), before ramping up to 320K tonnes from FY22F.

• Other key highlights from Press Metal’s analyst briefing: 1) Press Metal does not expect any impairment on its aluminium inventory despite the recent sharp drop in aluminium prices. This is because the group does not hold its inventories for a long period of time and usually sells them off within a 3-week cycle. 2) Due to the movement control order (MCO) and lockdown, 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 the coming months. Our forecasts have already factored in the sales tax that has effectively eroded its earnings by about 7%; and 3) We understand that Press Metal has sold forward about 20–25% of its remaining production in FY20F at “good” prices, which we estimate that they could be in the region of US$1,900/tonne. YTD, aluminium prices have averaged at US$1,631/tonne and they have been on an uptrend in recent weeks. As it stands now, there is a good chance that Press Metal may beat our FY20F average aluminium price assumption of US$1,600/tonne. Nonetheless, we are in no hurry to revise our assumption as the global economic recovery in 2H2020 could still be a bumpy one.

Source: AmInvest Research - 9 Jun 2020