- We maintain BUY on Press Metal with a higher fair value of RM3.07/share (vs. RM2.95/share previously), based on a 12x PE of FY14F core FD EPS of 25.6 sen.

- Press Metal is selling a 20% stake of its unit Press Metal Bintulu Sdn Bhd (PMBSB) to Japan-based trading company Sumitomo Corp for a provisional cash consideration of USD140mil (RM444mil).

- The proceeds would be used for repayment of borrowings and working capital. The proposed disposal is expected to result in a net gain of RM336.4mil in FY14F.

- The disposal is conditional on PMBSB fulfilling a few operational criteria. The consideration is also subject to certain adjustments in the relation to the balance sheet, capex, an earn-out clause and production costs up to end-FY18F.

- The maximum adjustment is capped at USD69mil in favour of Press Metal, and USD43mil in favour of Sumitomo by end-FY18F. We have not factored this into our model.

- Although the disposal of the 20% stake in PMBSB is earnings dilutive, it is mitigated by lower interest expenses as proceeds will go towards repayment of borrowings.

- We expect the net gearing to be reduced to 1.2x in FY14F from 1.7x as at end-June 2013.

- Recall that Press Metal is also exiting its loss-making Chinese smelter business via an asset swap.

- With the sale of PMBSB stake and its exit from the lossmaking Chinese smelter business, our FY14F-FY15F earnings have increased by 2%-4% to RM163mil-RM262mil (from RM156mil-RM256mil previously).

- All in all, we are positive on the disposal as it will help Press Metal to partly realise its investments in the Bintulu plant and reduce gearing, while securing an off-take agreement with Sumitomo. Press Metal will be able to leverage on Sumitomo’s global network to market its aluminium products.

- While 2HFY13F earnings will be dampened by the shutdown of its Mukah plant, we see a significant earnings boost in FY14F, driven by:- (i) resumption of Mukah plant operations; (ii) full ramp-up of its Bintulu plant; (iii) one-off cash compensation for the shutdown of the Mukah plant; (iv) gain on disposal of the 20% stake of PMBSB to Sumitomo; and (v) exit of its loss-making Chinese upstream operations.

Source: AmeSecurities