Investment Highlights

• We increase our FY20–22F net profit forecasts by 4%, 21% and 17% respectively and raise our fair value by 17% to RM4.97 (from RM4.25 previously) based on 18x revised FY22F EPS. These are largely to reflect higher aluminium price assumptions. While the 18x multiple is in line with FBM KLCI’s 5-year historical average P/E, 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 9MFY20 core net profit of RM322.8mil (adjusted for PPE written off predominantly) came in at 73% of our full-year forecast and 78% of full-year consensus estimates respectively. However, we consider the results above expectations as we expect a stronger 4QFY20 on significantly higher aluminum prices.
• Its 9MFY20 core net profit dropped 8% YoY mainly due to lower aluminium prices realised, as indicated by a 9% fall in average aluminium spot price to US$1,666/tonne in Jan– Sept 2020 (vs. US$1,831/tonne a year ago). This was partially mitigated lower cost of input alumina, as reflected in a 29% fall in average alumina spot price to US$268/tonne in Jan–Sept 2020 (vs. US$380/tonne a year ago).
• YTD, aluminium spot prices have averaged at US$1,702/tonne and it was last traded at US$1,970/tonne, whereas alumina spot prices have averaged at US$268/tonne and it was last traded at US$295/tonne.
• We revise our assumptions for average aluminium selling price per tonne upwards for FY20–22F to US$1,780, US$1,950 and US$2,050 respectively (from US$1,680, US$1,800 and US$1,900). This is to reflect the general uptrend in global commodity prices on better recovery prospects with the availability of effective vaccines.
• While the outlook for commodities in general, including aluminium, has improved, we are still mindful of Press Metal’s premium valuations vs. that of its much larger global peers. This shall cap further upside to its share price.
• On a brighter note, Press Metal recently signed 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 - 27 Nov 2020