Investment Highlights

• We maintain our HOLD recommendation, forecasts and fair value of RM4.25 on Press Metal based on an 18x 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.
• European Commission has imposed a 38.2% provisional anti-dumping duties on products of Press Metal’s Chinabased aluminium extrusion operations (in Guangdong). The impact on Press Metal’s earnings are insignificant because:
  
  1. EU is a small market for Press Metal’s extrusion products produced in China. According to Press Metal, for FY19, its extrusion product exports from China to EU contributed only about 4.6% and 2.8% of its total revenue and profits. Similarly, for 1HFY20, we estimate that extrusion product exports from China to EU contributed only about 2% and 1% of its total revenue and EBIT; and
  
  2. Press Metal has the flexibility to realign its extrusion product exports geographically, as it also has an extrusion plant in Klang, Malaysia (that is not subject to the latest EU anti-dumping duties). We understand that in anticipation of the duties, steps have been taken to re-route exports to EU from the plant in Malaysia (from the one in China). Meanwhile, the plant in China will supply to South-East Asia region.
   
• 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. 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 - 15 Oct 2020