- We maintain BUY on Press Metal Bhd and raise our fair value to RM6.00/share (from RM4.50/share previously), pegged to 15x PE over FY14F core FD EPS of 40 sen.

- We have increased our PE multiple to 15x (from 12x previously) as Press Metal is a prime beneficiary of rising aluminium prices and premiums. Earnings are surging from a low base, with its trajectory boosted by rising aluminium prices from a 4-year trough level.

- We have raised our FY14F-16F core net profit by 10%-12% to reflect higher selling prices and premium assumptions. Our FY14F core FD EPS is now 40 sen (vs. 37.5 sen earlier).

- Likewise, FY15F core FD EPS is raised by 5% to 47.2 sen from 44.8 sen. Our FY16F EPS is increased to 47.4 sen from 46 sen.

- Press Metal is a direct beneficiary of rising aluminium prices. Its smelters are currently operating at maximum capacity (440,000 metric tonnes) and have competitive production costs compared to peers.

- To reflect macro demand, we have revised upwards our selling price assumption to US$1,850/MT (from US$1,800/MT earlier) and premiums from US$250/MT to US$300/MT.

- Aluminium prices have reached a 17-month high due to low inventories, high demand and the cut in global capacity. Yesterday, the LME spot aluminium closed at US$2003.25/MT, a 14% YTD gain. The YTD average is US$1,772.66/MT.

- Similarly, global aluminium premiums have reached all-time highs due to strong demand for physical deliveries. Yesterday, global aluminium premiums were trading at US$305-US$432/mt (see chart 3).

- Smelters are being shuttered worldwide due to rising costs. At the same time, demand is expected to grow by 6% annually due to higher usage in automobile, aerospace and other industries. For the first time in almost a decade, there will be a global aluminium deficit of 930,000MT this year (see table 2).

- Press Metal declared an interim 5 sen dividend last quarter to reward its shareholders. Following this, we have increased our dividend payout assumptions to 15 sen-17 sen for FY14F- 16F (vs. 4 sen -5 sen earlier), based on a payout ratio of ~30%. These translate to yields of 3%-3.5%.

- We deem this to be possible due to strong cash flow generation in the coming years. We expect capex to be minimal at RM60mil-RM80 mil per annum. Balance sheet is expected to improve with net gearing expected to fall to 0.9x in FY15F (from 1.9x last year).

- Press Metal is currently trading at 12x PE. Maintain BUY.

Source: AmeSecurities