PMetal is expected to record a significant rise in its FY21-22 earnings as there has been a divergence between alumina cost and aluminium price caused by China’s limit on aluminium production, coupled with the abundance of alumina supply. The aforementioned instance has resulted in an increase in its profit margins. We also view its current ESG initiatives positively. Hence, we maintain our BUY call at a higher TP of RM12.00 (from RM10.00) based on an unchanged 40.3x FY22EPS as we revise our FY21/22 net profit forecasts by 21/20% from our adjustments on our alumina cost assumptions.

Divergence between alumina cost and aluminium price. There has been a divergence with regards to alumina and aluminium prices as alumina and bauxite supply (not energy intensive) has been abundant as compared to aluminium (energy intensive). This is largely attributable to the production cap of 45mtpa implemented by China to curb its coal usage in order to reduce carbon emissions as more than 80% of smelters in China are coal-fired. Hence, we have revised our assumptions on Alumina cost as a percentage of price from 18.5% previously to 16.5% for FY21-22f despite its current YTD average of c.15% as we choose to be on the more conservative end of our forecasts. Recall that Alumina cost as a percentage of LME aluminium price typically ranges from 15.5 - 18.5%.

Demand and supply of aluminium. We believe that the demand and supply dynamics is becoming more favourable for the PMetal based on the following reasons: (i) The high cost of China’s smelters, particularly for those who are operating coal-fired power plants, renders it unattractive for them to increase its production capacity, besides the capacity cap implemented, (ii) There will only be 720,000mt of additional capacity coming on stream in 2021 (320,000 mtpa: PMetal, c.400,000 mtpa: UC Rusal) with no material planned increases in capacity expected in 2022, (iii) Aluminium demand is expected to record a sharp recovery from the timeline of vaccine rollouts, (iv) China has also been a net importer of aluminium in 2H20 due to its smelters operating below full capacity from high electricity costs, (v) PMetal’s hydro-run smelter would also mean that its aluminium is produced using RE and this bodes well with its clients who are aiming to be more ESG centric (vi) Decarbonisation initiatives around the world is also driving aluminium demand as transportation mediums like electric vehicle, rail transits and RE utilizes a lot of aluminium.

Sustainability. PMetal is confident that it can be included into the FTSE4Good Bursa Malaysia index, targeting a score of more than 2.9. In order to achieve this, Press Metal plans to enhance its ESG framework and disclosure. It plans to vie for Aluminium Stewardship Initiatives (ASI) certification (a global ESG standard for aluminium industry) and the Company is working its way towards obtaining the certification for its Samalaju plants, which is expected to commence between August 2021 and March 2022.

Forecast. We upgrade our earnings forecasts by 21/20% for FY21/22 as we decrease our alumina cost assumptions by 2.0% while maintaining our aluminium price forecast at USD2,000/2,100/mt.

Maintain BUY with a higher target price of RM12.00 based on an unchanged 40.3x FY22 EPS. We maintain our BUY call at a higher target price of RM12.00 based on 40.3x FY22 EPS as we adjust our earnings assumption from our lower alumina cost assumption. Press Metal is expected to record stellar earnings growth going forward due to (i) higher aluminium prices, (ii) lower alumina costs and (iii) improving demand and supply dynamics for aluminium and (iv) its larger emphasis on ESG would have the potential to rerate its valuation multiples higher.

Source: Hong Leong Investment Bank Research - 9 Mar 2021