Investment Highlights

• We increase our FY21–22F net profit forecasts by 27% and 11% respectively, and raise our fair value by 11% to RM5.53/share (from RM4.97/share previously) based on 18x revised FY22F EPS, on higher aluminium price assumptions. While the 18x multiple is in line with the 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.

• Key highlights from Press Metal’s analyst briefing last Friday are:

1) A decision is still pending on the Sarawak state government’s 1% state sales tax on aluminium products, first proposed in Nov 2019. This is because consultations with stakeholders, preferably on a faceto-face basis, are still not possible as the pandemic rages on. Recall, our forecasts have already factored in the sales tax which has effectively eroded Press Metal’s earnings by about 7%;

2) The group highlighted that both the Phase 3 Samalaju expansion and PT Bintan alumina refinery project are on track. Recall that the Phase 3 Samalaju is targeted to start commissioning by January 2020 (currently pending the approvals for the arrivals of high-skilled engineers from China to kick-start the machineries and smelters) while the group’s 25%-owned PT Bintan alumina refinery project is targeted to commission in 1QFY21. Recall that the group is constructing a 1.0miltonne alumina refinery project together with necessary facilities in Galang Batang, with plans for another expansion for another 1.0mil tonnes in 4QFY21. Upon commissioning, the group will be able to hedge against the volatility in the spot prices of alumina input in the future.

3) Press Metal expects the current uptrend in aluminium prices to persist into 2021.

• We raise our average aluminium selling price assumptions to US$2,050/tonne and US$2,100/tonne in FY21–22F (from US$1,950/tonne and US$2,050/tonne previously, while maintaining US$1,780/tonne for FY20F. YTD, aluminium prices have averaged at US$1,704/tonne and it was last traded at US$1,999/tonne.

• We have identified the robust recovery in the auto market in China as the single largest driver of aluminium prices. It has been instrumental in making China a net importer of aluminum in Jul and Aug 2020 thus far, as well as driving down inventory at the London Metal Exchange (LME). Recall, China is the largest producer and consumer of aluminium in the world with a global share in excess of 50%.

• Aluminium inventory in the LME dropped by 17% from a peak of 1.67mil tonnes on 27 July 2020 to 1.38mil tonnes on 27 November 2020, while LME aluminium prices rose by 17% during the same time frame, from US$1,708/MT to US$1,999/MT (Exhibit 1).

• Zooming in onto China’s automotive industry, which is the largest in the world, the Wall Street Journal quoted the China Passenger Car Association as saying that China’s auto sales rose for a fourth straight month in October (+8% YoY) to just under 2mil vehicles for the passenger vehicle segment. Toyota Motor Corp said its China sales increased by 33% in October YoY, while Nissan Motor Co. grew its China sales by 5% YoY.

• Other automakers also reported strong quarterly figures for the July–September period in China. BMW sales surged 31% YoY for the quarter, while Daimler and Mercedes increased 24%. Ford Motor’s quarterly China sales increased 22% YoY, while Honda’s were up 20% and General Motor’s grew 12%.

• China auto sales have effectively recovered to pre-pandemic levels (Exhibit 2). Adding on to the bullishness, we gathered that the growth in the higher end market actually outpaced that in the mass market, rising 30% from 2019. S&P Global shares the same upbeat view, forecasting China’s light vehicle sales will expand by 4– 6% in 2021 and 2–4% in 2022. S&P Global is also projecting a 10–15% auto sales recovery in 2021 for the US.

• Meanwhile, we expect the prices of alumina to also rise on increased demand for raw material to produce primary aluminium. As such, we raise our assumptions for average alumina cost per tonne in FY21–22F to US$300–US$320 (from US$280–US$300 previously).

• Press Metal’s outlook has improved due to a stronger-than-expected recovery in aluminium prices. However, we maintain our view that its share price is likely to be capped due to its significant premium valuations vs. its much larger global peers. 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 - 30 Nov 2020