• 1Q19 core profit fell 23% yoy on lower aluminium prices and higher operating costs as a result of high alumina prices.
• It trailed ours and consensus estimates at 11% and 15% respectively, prompting us to lower 2019/20F estimates by 41%/43% (Table 2) on lower aluminium price assumption of US$1,800 per tonne from US$2,100 per tonne.
• A first interim DPS of 1.25sen was declared which is slightly lower than the 1Q18 DPS of 1.5sen.
• Downgrade to Hold (from Buy) with a new TP of RM4.20 (from RM5.69) which implies FY19F PE of 29x. Despite the uncertainties from the trade tension, we believe the stock still offers good longer term prospects. Add on weakness.

Profit dragged by softer metal price and high opex

While revenue improved yoy to RM2,171m (1Q18: RM2,125m) despite lower aluminium price, this was mostly attributed to contribution from value-added products. However, gains were offset by increase in opex amidst higher alumina prices which led to EBITDA margins narrowing to 13%. Overall, 1Q19 core net profit of RM 116m fell short of our estimates and consensus at 11% and 15% respectively.

QoQ performance nosedived on high cost

On qoq basis, earnings fell 34% while EBITDA eased to RM288m (-20% qoq). This was due to combination of marginal decline in revenue and higher input costs from alumina which saw EBITDA and PBT margins coming under pressure.

Challenging earnings outlook

Management guided on its strategy to streamline into value added products by raising output to 60% of revenue in 2019 (2017: 30%). This may provide better revenue insulation. However, we note that there is uncertainty on the global aluminium outlook, in addition to weakening US$ which may weigh on earnings. We cut our 2019/20F earnings by 41%/43% (Table 2) as we factor in lower aluminium price assumption. We believe the average price of aluminium is expected to hover around US$1,800 per tonne, lower than our initial ASP forecast of US$2,100 per tonne.

Dividend declared

A first interim DPS of 1.25sen was declared. This is lower than 1Q18 DPS at 1.5sen. We estimate a total of 7.6sen DPS (at 50% payout ratio) for 2019 which implies a dividend yield of 1.6%.

Downgrade to Hold with new TP RM4.20

We downgrade the stock to Hold (from Buy) with a new TP of RM4.20 (from (RM5.69). This is derived using the GGM formula which implies a fair P/B multiple of 3.7x and sustainable ROE of 23%.

Source: BIMB Securities Research - 28 May 2019