Investment Highlights

• We maintain our HOLD call, forecasts and fair value of RM4.25 on Press Metal based on an 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.
• Key highlights from Press Metal’s analyst briefing:

1. Press Metal expects aluminium prices to improve further in 2H2020, driven by better demand on economic recovery, especially in China, while the supply-side pressure is benign in the absence of new capacity coming online globally. We are mildly positive on the alumimium price trend for a slightly different reason, i.e. the weakening USD that buoys commodity prices across the board, against a backdrop of just a mild recovery in demand. We maintain our assumptions on average aluminium selling prices per tonne of US$1,680, US$1,800 and US$1,900 in FY20-22F.

2. The Sarawak state government has yet to finalise its decision with regards to the imposition of a 1% state sales tax on aluminium products (proposed in Nov 2019) due to the disruption from the movement control order (MCO). We hold the view that the state government is unlikely to change its mind as: (1) it needs substantial funding to carry out state infrastructure projects; (2) given the altered political landscape, it could no longer depend on federal funding to implement these projects; and (3) there is a need to broaden its state tax base. Our forecasts have already factored in the sales tax that has effectively eroded its earnings by about 7%;

3. The Phase 3 Samalaju expansion (which will increase its aluminum smelting capacity by 42% to 1.08mil tonnes from 760K tonnes) is on track for completion and commissioning by January 2021. It is pending the approvals for the arrival of high-skilled engineers from China to kick-start the machineries and smelters. Meanwhile, we gather that Press Metal’s 25%-owned PT Bintan alumina refinery project will be slightly delayed (by about 2 months) due to the Covid-19 pandemic. Recall that the group is constructing a 1.0mil tonne alumina refinery project together with necessary facilities in Galang Batang, with plans for another expansion for another 1.0mil tonne in 4QFY21. Upon commissioning, the group will be able to hedge against the volatility in the spot prices of alumina input in the future

• 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 (as aluminium production has not slowed down throughout the pandemic, while consumption takes time to recover); (2) the unusually high volatility in the cost of input alumina in recent years, more often than not resulting in severe margin squeeze to aluminium producers; and (3) the company’s premium valuations vs. those of its much larger global peers, capping 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 - 21 Aug 2020