Investment Highlights

• We increase our FY21–22F net profit forecasts by 11% and 20% and also raise our fair value by 20% to RM6.64 (from RM5.53 previously) based on 18x FY22F EPS. These are largely to reflect higher aluminium price assumptions. While the 18x multiple is in line with the average historical forward PE 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 FY20 core net profit of RM495.0mil (adjusted for PPE written off and premium paid on early senior bond redemption predominantly) came in above expectations, beating our full-year forecasts and full-year consensus estimates by 7% and 11% respectively. We believe the key variance against our forecast came largely from higher-thanexpected realised aluminium prices in 4Q20.

• Press Metal’s FY20 core net profit was up 1% YoY despite lower aluminium prices realised, as indicated by a 4% fall in average aluminium spot price to US$1,732/tonne in 2020 (vs. US$1,813/tonne a year ago). However, the lower cost of input alumina, as reflected in a 23% fall in average alumina spot price to US$275/tonne in 2020 (vs. US$357/tonne a year ago), was more than enough to mitigate the lower aluminium prices realised throughout the year.

• YTD, aluminium spot prices have averaged at US$2,032/tonne and it was last traded at US$2,147/tonne. Meanwhile, alumina spot prices have averaged at US$301/tonne and it was last traded at US$300/tonne.

• We revise our assumptions for average aluminium selling price per tonne upwards for FY21–22F to US$2,100 and US$2,200 respectively (from US$2,050 and US$2,100 previously). This is to reflect the general uptrend in global commodity prices across the board on better recovery prospects with the availability of effective vaccines. We understand that Press Metal has already hedged about half of its forward sales for FY21F prior to the post-Lunar New Year rally in aluminium prices.

• Meanwhile, we expect the prices of alumina to also rise on increased demand for raw material to produce primary aluminium. As such, we also increase our assumptions for average alumina cost per tonne in FY21–22F to US$330– US$360 (from US$300–US$320 previously).

• 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’s 15-year power purchase agreement (PPA) signed with Sarawak Energy Bhd for the supply of 500MW of electricity shall enable it to power an additional annual aluminium smelting capacity of 320K tonnes. This will boost its overall smelting capacity by 42% by 1.08mil tonnes by 2021 from 760K tonnes currently.

Source: AmInvest Research - 25 Feb 2021