Investment Highlights

• We increase our FY20–22F net profit forecasts for Press Metal by 7%, 11% and 8% respectively to reflect stronger aluminium prices. We also raise our FV by 8% to RM4.25 (from RM3.94 previously) based on 18x revised FY22F 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.
• Press Metal’s 1HFY20 core net profit of RM197.3mil (adjusted for PPE written off mostly) came in at 47% of our full-year forecast and 51% of full-year consensus estimates respectively. However, we consider the results above expectations as we expect a stronger 2H on recovering aluminum prices.
• Its 1HFY20 core net profit dropped 10% YoY mainly due to lower aluminium prices realised, as average aluminium spot price fell 13% in to US$1,642/tonne in Jan-June 2020 (vs. US$1,852/tonne a year ago). This was partially mitigated by the lower cost of input alumina, as reflected in a 34% fall in average alumina spot price to US$265/tonne in Jan-June 2020 (vs. US$400/tonne a year ago).
• YTD, aluminium spot prices have averaged at US$1,687/tonne and it was last traded at US$1,746/tonne, whereas alumina spot prices have averaged at US$265/tonne and it was last traded at US$282/tonne.
• We revise our assumptions for average aluminium selling price per tonne upwards for FY20–22F to US$1,680, US$1,800 and US$1,900 respectively (from US$1,600, US$1,700 and US$1,800). This is to reflect the general uptrend in global commodity prices across the board on the back of the weakening USD.
• We remain cautious on Press Metal’s outlook as: (1) the upside to global aluminium prices is capped by a significant build-up of inventory (aluminium production has not slowed throughout the pandemic, while consumption takes time to recover); (2) the unusually high volatility in the cost of input alumina in recent years, which more often than not, resulted in severe margin squeeze to aluminium producers; and (3) the company’s premium valuations vs. those of its much larger global peers, limiting the upside to its share price.
• However, this could be partially 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 - 19 Aug 2020