- We maintain HOLD on Press Metal Bhd with a higher fair value of RM3.72/share, as we roll forward our base year to FY15F. Our fair value is based on 14x FY15F FD EPS.

- Press Metal yesterday signed a power supply term sheet with Sarawak Energy Bhd for the supply of 500MW of electricity to its proposed Phase 3 smelter plant in the Samalaju Industrial Park.

- Following the term sheet agreement, Press Metal is expected to sign a 25-year power purchase agreement (PPA) and a connection agreement soon.

- The 500MW supply will be utilised for Press Metal’s expanded capacity in Samalaju to 640,000MT (from 320,000MT currently) under Phase 3.

- According to management, the first drawdown of 330MW is expected by end-2015, while the remaining 170MW will be supplied by early-2018.

- Once completed, Press Metal’s total capacity will increase to 760,000MT (including 120,000MT at its Mukah plant).

- Press Metal is expected to complete the construction of the first 200 pots (out of total 300 pots) by end-2015 on the existing land next to its current facility in Samalaju. Land clearing works have already begun on the site.

- We understand that the tariff rate for the new PPA (with an annual escalation) is competitive and is at a slight increase to the rate it is currently paying.

- Capex for the new plant is also expected to be less vis-à-vis ~US$600mil that was spent on phase 2, i.e. on Samalaju’s current plant capacity. We believe that the plant will likely be funded via 70% cash and 30% borrowings over four years.

- According to management, the additional capacity is in anticipation of rising demand for aluminium products globally.

- Nevertheless, we maintain our numbers for now pending finalisation of the details, and considering the uncertain global economic outlook for next year.

- Notably, we expect any meaningful capacity to come through from FY16F onwards while costs are expected to increase given the group’s capex needs.

- We also remain cautious in our assumptions on aluminium prices for next year given the macroeconomic slowdown in China, Japan and Europe. We maintain HOLD.

Source: AmeSecurities