• Press Metal Aluminum Holdings Berhad (PMETAL) growth prospect is set to be driven by competitive advantage from upstream segment and potential expansion in midstream.

• PMETAL is also a champion in ESG initiative as the company uses hydropower as a source of energy thanks to its long-term agreement with Sarawak state government for its smelter plants. It also has no labour issue as 80% of manpower come from Sarawak.

• On the plus side, aluminum price has started to stabilize in CY22 despite on-going surge in alumina and carbon anode prices.

• Though alumina and carbon anode prices are on the rise but we are unperturbed thanks to the company’s 50% and 25% equity in Japan Alumina Associates (Australia) Pty. Ltd. (JAA) and PT Bintan Alumina Indonesia (PT BAI) which put the company in steady condition to secure raw material at competitive prices. JAA also holds a 10% equity interest in Worsley Alumina Unincorporated Joint Venture (Worsley UJV) located in Australia, one of the largest and lowest cost alumina producers.

• PMETAL prospects will be driven by solid global demand given production headwinds in Europe and China, robust regional infrastructure spending, burgeoning demand for EV cars and reacceleration in construction initiative post pandemic.

• PMETAL will also benefit from Sarawak SCORE investment incentives particularly its very competitive electricity tariff and hence, its cost structure.

• Ample capacity will also boost product mix from VAPs and therefore, revenue potential.

• We re-initiate coverage on PMETAL with a BUY call and TP of RM7.05 pegged at 30x PER to FY23F EPS of 23.5 sen.

• Our target price offers a solid upside potential of 76.3% and the recent drop in share price gives investors an opportunity to accumulate on dip.

Largest integrated aluminium smelter and extruder player

PMETAL has grown over the years from private extruder player to one of the largest smelter players in Southeast Asia. PMETAL business trajectory is expected to be driven by the commencement of Samalaju Industrial Park Phase 3, augmented value-added products (VAPs) capacity, competitive cost advantage on electric tariff as well as potential upside on aluminium price.

Prospering growth from smelting segment

We expect additional capacity from smelter plants as well its VAPs products to anchor growth going forward. Management is targeting to achieve a 50% contribution from VAPs products to total production volume by CY23 where this will improve profitability. Better products mixed from VAPs will enhance profit margin compared to standard aluminium ingots.

A good ESG company

The Group’s smelters are run on hydropower which position them as a low-carbon aluminium maker. The Group could therefore benefit from global decarbonisation agenda and rising investor interest in Environment, Social and Governance (EGS) initiatives. Moreover, aluminium is an environmentally friendly product as it can be recycled to produce the same product. Besides, PMETAL has a low risk on labour issue given 80% employee are Sarawakian. Note that PMETAL has among the highest rating on ESG following a 4.8 score from 5.0.

Soft tune on aluminium price

Aluminium price is set to remain elevated in mid-term though may not surpass its recent peak (USD3,877 per metric tonne in March 2022) due to weaker global demand despite current low inventory level (chart 5). Note that the Group has hedged at least 60% of aluminium price and thus partially reduce the risk of any price pullback. We pencil aluminium spot price assumption of USD2,500- USD2,650 per metric tonne for FY22F-FY24F (YTD 2022: USD2,830 per metric tonne) respectively though this will be further boosted by better output on VAPs which comes with better margin.

Re-initiate with a BUY call and TP of RM7.05

We re-initiate coverage on PMETAL with a BUY recommendation and TP of RM7.05 based on average 5-year historical PER of 30x, pegged to FY23F EPS of 23.5sen.

Source: BIMB Securities Research - 30 Sept 2022