-  We re-affirm BUY on Press Metal with higher fair value of RM3.60. The higher fair value reflects:- (i) higher target PE (of 12x from 10x previously) as we roll forward our valuation base to FY14F to capture full-year roll-out of Phase 2 of its capacity extension programme; (ii) higher net profit estimates to reflect higher capacity assumptions from its new Samalaju plant under Phase 2 (i.e. from 240,000 tonnes p.a. to 320,000 tonnes); (iii) introduction of FY15F estimates.

-  Management is ramping up production for Phase 2C and is targeting full-capacity by year-end. Currently, Phase 2A and 2B have a capacity of 220,000 tonnes. Mukah plant (Phase 1) has a capacity of 120,000 tonnes. Overall utilisation is currently ~50% and management is targeting 100% in FY14F.

-  The new Samalaju port has a lower production cost of circa US$30/tonne due to better logistical advantages and improved operational efficiencies via this new state-of-theart plant (400kA technology). This is compared to US$60/tonne for its Mukah plant. We expect cost to further decrease once the Samalaju port is opened by 2016.

-  Apart from that, Press Metal also enjoys:- (i) double-tax exemption for 10 years due to its pioneer status, (ii) attractive power supply rates from a long-term deal with Sarawak Energy Bhd.

-  As at end-March, Press Metal has a net gearing of 170%. However, we expect it to decrease to 114%-161% for FY13-15F as capacity expansion has been frontloaded and management is looking at ways to pare down debts.

-  Another key catalyst is the possibility of Japan’s Sumitomo taking up a 20% stake in the Samalaju smelter. Both parties signed a MoU in April and have 6 months to decide. We view this positively as Press Metal could leverage on Sumitomo’s global network and it would help pare down Press Metal’s debts.

-  Management says power shortfall for its Mukah has been resolved since early this year, and it is running at full capacity. Meanwhile, its China upstream operation is still loss-making as production cost is higher than selling prices. The management says it is considering some rationalisation plan while its downstream operations remain profitable.

-  Press Metal has the makings of a regional aluminium giant; It is one of only two producers of aluminium within the fast-expanding ASEAN market and it is the only listed aluminium smelter within this region. Valuations remain compelling at core FD FY13F-15F PEs of 7x-11x on robust EPS CAGR of 59%.

Source: AmeSecurities