• We initiate coverage on Press Metal and forecast the full capacity production of its Samalaju smelter to drive 3-year earnings by a robust 24.2% CAGR.

• Changing dynamics in supplies and flows in global market will sustain multi-year high aluminium price increase seen recently, in our view.

• We believe its recent focus into value added products via production and merger and acquisition is a step in the right direction that will ensure ROE remains above industry average.

• Initiate coverage with BUY recommendation and ROE to Book value-derived TP of RM5.69 which implies FY18F PE of 29.3x.

Aluminium prices to remain high

We expect global disruption in supplies due to geopolitical issues to sustain recent gains in aluminium prices. Prices on the LME has risen to a multi-year high of USD2,325 last week as US sanction on a major aluminium producer, United CO Rusal took effect.

Robust earnings growth forecast

With aluminium price being the main driver to earnings, we forecast Press Metal to register earnings CAGR of 24.2% over the next 3 years. Earnings expansion will also derive from additional capacity of value-added products and acquisition of Leader Universal Aluminium in 2018. We forecast Press Metal’s above-average ROE to remain superior, sustaining over 30% in FY19 and FY20 from 28.8% in FY18.

Appreciating the advantage of value added products

We are positive with its growth prospect as the management charts a clear vision for Press Metal to diversify away from its current primary ingot production into value added products. Value added products provide revenue insulation based on the pricing components and the increasing demand. With demand for transportation, construction and electrical cable growing steadily at about 3-4% annually and its correlation with aluminium prices, we believe immediate risk to down-cycle in aluminium demand is low.

Initiate with a BUY recommendation at RM5.69

We initiate coverage on Press Metal with a BUY recommendation and RM5.69 TP, derived using the GGM formula that implies a fair P/B multiple of 5.6x and sustainable ROE of 33.9%. Our valuation assumes 8.5% cost of equity (ke) and long term growth rate of 3%. At our TP, the stock implies 29.3x FY18F PE, reflecting re-rating catalyst from higher value-added product sales and aluminium price surge.

Metal of the future

We initiate coverage on Press Metal with BUY recommendation and a target price of RM5.69. We expect aluminium prices to sustain above USD2,000 per tonne supported by a favourable supply/demand dynamics. With aluminium price being the key driver to its earnings, we forecast Press Metal to be positively impacted, resulting in a net profit CAGR of 24.2% over the next 3 years (over 2017-2020F). The earnings growth potential for Press Metal offers a fairly attractive long-term investment, in our view, as gains in aluminium prices are likely to sustain. Additionally, new capacity of value-add products at its Samalaju smelter (under phase 2 which completed in 2017) will sustain revenue growth, and coupled with low energy cost, will raise its net profit margin from 7% to 13% during our 3-year forecast period.

With global transportation demand growing steadily at 3-4%, tracking global GDP growth, we expect demand for Press Metal’s product to remain resilient driven by the need for lighter and cheaper materials. The higher probability of a market deficit due to US recent trade policy sanctioning products from United Co Rusal (UC Rusal), and steady demand growth for aluminium could propel LME aluminium price higher this year. Furthermore, close proximity to key growing markets like India and Asia Pacific would maintain Press Metal’s competitive position. We discuss the supply and demand scenario for aluminium – and a declining inventory level – in this report, which could be moving into a deficit situation as the global market finds a new equilibrium.

In recent months, the sentiment towards the aluminium industry outlook has been plagued with uncertainty, resulting in higher volatility in prices traded. As we note, the uncertainty is primarily focused on the upcoming tariff by the US, the US sanction on Russia’s aluminium producer, and the antipollution plan engaged by China. This is reflected in the current market price of aluminium, which has fluctuated between US$1,900 levels to US$2,200 in 1Q18.

Further ahead, Press Metal’s growth prospect remains positive as management continues to chart a clear vision for the company to diversify into value added products with the completion of Samalaju plant phase 2. We expect possible M&A ahead to insulate themselves from the fluctuations in cost and price volatility.

Valuation

We initiate our coverage on Press Metal with BUY recommendation and ROE to book valuederived target price (TP) of RM5.69. This implies a FY18F PE of 29.3x before easing to 21.9x FY19F PE. Our TP is derived using the Gordon Growth Model (GGM) formula which implies a fair P/B multiple of 5.6x based on a sustainable ROE of 33.9%, 8.5% cost of equity (ke) and long term growth rate of 3%.

Source: BIMB Securities Research - 17 Apr 2018