We initiate coverage on Press Metal Aluminium as its profit is expected to improve significantly through higher aluminium prices and the commissioning of Samalaju phase 3. We believe that aluminium is the metal of the future due to its strength, malleability and weight. We expect aluminium demand to be supported by countries gravitating towards reducing its net carbon emissions. We have already seen a big shift from the usage of steel to aluminium for the auto sector over the last few years due to its lower emittance of carbon and this is expected to continue going forward. The distribution of an effective vaccine is also expected to support aluminium demand, leading to a price recovery. We initiate coverage on Press Metal Aluminium with a BUY call at TP of RM10.00 based on 40.3x FY22 EPS which is +1SD above its 5-year historical mean.

Strong growth underpinned my 320,000 mtpa of additional capacity and higher aluminium prices. We expect Press Metal to experience a revenue and profit CAGR of 13% and 29% respectively from FY20-23f due to its 320,000mtpa of additional capacity (May-21) and higher aluminium prices. Its additional capacity would bring its total aluminium smelting capacity from 760,000 mtpa to 1,080,000 mtpa (+42%).

Aluminium prices to be supported by the food packaging industry. While Covid19 has significantly lowered aluminium demand and prices for the most part of 2020, its high demand for the food packaging industry has ensured that aluminium prices did not crash below levels seen in 2016. Aluminium prices have since risen through higher demand from China due to its better than expected economic recovery.

One of the most cost competitive aluminium smelters in the world. Press Metal is one of the most profitable aluminium smelters in the world due to its competitive cost structure as (i) Press Metal has secured one of the most cost-competitive electricity rates through its PPA with SCORE, (ii) its backwards vertical integration initiatives (alumina sourcing), (iii) automation of its factories and (iv) competitive labour rates from East Malaysia.

High free cash flow yield post-commissioning of Samalaju phase 3. Press Metal’s expansionary capex is expected to decline significantly post-commissioning of Samalaju phase 3. Thereafter, its total capex is expected to be c.RM70m yearly, barring any additions to its value added capacity. Its free cash flow yield is expected to range from 5-6% from FY22 to FY25 and the Company is expected to be net cash in FY24f.

Forecast. We forecast FY20 earnings to come in at RM441.3m (-7% YoY), a commendable return in spite of the Covid-19 pandemic, which dampened demand and prices. We expect FY21 and FY22 earnings to come in significantly stronger at RM755.7m and RM999.9m respectively due to higher aluminium prices and demand from the recovering global economic outlook and lower net carbon initiatives. We expect aluminium prices to average at USD2,000/2,100/2,100mt for FY21-23f in view of the recovering fundamentals of the aluminium market.

Dividend. We expect Press Metal to stick to its dividend policy of paying out 30-50% of its net earnings yearly. This would imply a current yield of 0.5/0.9/1.2% for FY20-22f.

Initiate with a BUY, TP: RM10.00. Our TP is based on FY22 EPS of 24.8sen pegged to a PE multiple of 40.3x, which is +1SD above its 5-year mean P/E. Our TP implies an upside potential of c.20% including dividends, we believe this is justified as Press Metal’s earnings trajectory is expected to be in the next 3 to 4 years.

Source: Hong Leong Investment Bank Research - 11 Jan 2021