Investment Highlights

• We cut our FY18-20F earnings by 15%, 11%, and 8% and trim our FV by 11% to RM3.23 (from RM3.64) for Press Metal. Our FV is based on 13x revised FD FY19F EPS, which is in line with the average forward PE of key global smelters. We maintain our HOLD call.

• During an analyst briefing yesterday, the company spoke about various headwinds which could dampen earnings including: 1) the escalation of production cost (i.e. carbon anode); and 2) the weakening of the USD against the MYR. We have reflected these in our revised forecasts.

• The price of carbon anode, which is one of the main raw materials for aluminium production (~18% aluminium production cost), has surged almost 70% in 2017. Factors that influenced the rise are the hike of its raw material costs which are petroleum coke and tar pitch. Not helping either are the production curb of commodity products like petroleum coke and anode in China during winter policy, which has further pushed the anode production cost upwards, resulting in higher carbon anode prices. As such, we revised up our carbon anode cost price in FY18- 20F by 10%, 5% and 8% to US$560, US$600 and US$660 respectively.

• Additionally, the weakening of the USD against the MYR will further dampen the company’s earnings as the company’s sales are denominated in USD. For every 1% drop in the USD/MYR, we estimate that the company’s overall earnings will be eroded by 2%. We revise our USD/MYR assumptions to 4.10 in FY18F and 4.00 in FY19- 20F, from 4.35 in FY18F and 4.20 in FY19-20F previously.

• Meanwhile, we are keeping our aluminium ASP assumptions at US$1,950/tonne, US$2,145/tonne and US$2,250/tonne for FY18-20F respectively, against a backdrop of firm aluminum prices in the international market. There is a downside risk to aluminium prices, assuming the US is to impose a 10% tariff on aluminium imports as planned.

• Assuming the tariff is to take effect, theoretically, aluminium in the US domestic market will trade at a 25% and 10% premium to international prices. This could prompt aluminium US producers to restart their idle capacities (which are not commercially viable based on the current international prices of steel and aluminium).

• We estimate that the US idle aluminium production capacity stands at about 1mil tonnes per annum, translating to about 50-60% of the total installed aluminium production capacity in the US.

Source: AmInvest Research - 7 Mar 2018