-  The Edge Financial Daily reported today it is looking to increase the production of value-added products to 50% from 20% currently.

-  Value-added products include alloy ingots that are used for the auto parts industry, its group CEO Datuk Paul Koon told the daily.

-  He noted that the group is already manufacturing alloy ingots for alloy wheel manufacturers, which then supply the wheels to auto companies such as General Motors Co and Hyundai Motor Co. Japan and South Korea are two of Press Metal’s biggest markets for the product.

-  We are not surprised with the news as Press Metal has been increasing its production of value-added products since the beginning of the year. Note that both of its plants are currently running at full production.

-  Its Mukah plant (120,000 MT) is producing billets which commands higher premiums compared to P1020 ingots, while its Samalaju plant (320,000 MT) is increasing production of A356 ingots (which commands similar margins to that of billets).

-  We understand that Press Metal can fetch premiums at around USD300/MT-RM450/MT on top of the LME spot aluminium price of USD1,993.85/MT currently.

-  Press Metal will benefit as the auto manufacturers increase aluminium content in their products. The Ford had begun producing an all-aluminium body for the F-150 pick-up truck in the US.

-  Earnings will improve sequentially for the rest of the year on the back of rising aluminium prices. For 2QFY14, Press Metal reported a strong sequential 114% growth to record a core net profit of RM60mil.

-  Recall that the group has proposed a 1-for-1 bonus issue of up to 584.9mil new shares.

-  Given its strong share price performance in the past few months, we deem Press Metal to be fairly valued at this juncture. Maintain HOLD.

Source: AmeSecurities