We are ecstatic and upbeat about Press Metal’s earnings prospects in the next 12-18 months, primarily due to: (1) soaring LME aluminium spot prices; (2) the progressive ramping up of the group’s Phase 3 Samalaju expansion project which will boost its overall smelting capacity by 42% to 1.08mil tonnes annually (from 760K tonnes previously); and (3) additional earnings boost from its 25%- owned PT Bintan alumina refinery (Phase 2) which is targeted to fully commission in 1HFY22. Maintain BUY with TP of RM7.42 (25x P/E on FY22F EPS).

Soaring LME aluminium spot prices. YTD aluminium prices have averaged at US$2,398/tonne and last chalked at c.US$2,915/tonne. It has recovered significantly by c.+100% from a low of US$1,465/tonne in April 2020 (when Covid-19 broke out).

Only the beginning of a multi-year bull cycle. We are expecting a sustained bull run in global aluminium prices over the next 12-18 months with the synchronised decarbonising movements to achieve net zero carbon emission and the general recovery post-pandemic across most countries. We envision the world at large to enter into an aluminium deficit in 2022-23F, in which demand would severely outstrip supply globally. This would ultimately lead to a drop in aluminium inventory in the London Metal Exchange (LME), lifting aluminium spot prices.

Phase 3 Samalaju and PT Bintan update. The Phase 3 Samalaju is targeted for full commissioning by Oct 2021, boosting its effective smelting capacity by 42% to 1.08mil tonnes (from 760K tonnes currently), which is a vital catalyst for earnings growth in FY22-23. Also, the group’s PT Bintan alumina refinery project has begun phase 1 (1.0mil tonnes annually) commissioning in 3QFY21 and is targeting completion of phase 2 (an additional 1.0mil tonnes) in mid-FY22.

Long-term business sustainability from investments in 25%-owned PT Bintan and 5% effective stake in Worsley. Combined, PMetal’s effective total alumina exposure via these two strategic holdings would be 355k tonnes, 605k ton nes and 730k tonnes for FY21-23F respectively (based on our assumptions). From a long-term business sustainability perspective, PMetal will be able to hedge against the volatility in alumina prices from its strategic stake in PT Bintan and Worsley.

Favourable alumina-to-aluminium ratio. YTD 2021, alumina prices have averaged at US$296/tonne and they were last seen at US$373/tonne (Figure 1). On average, alumina was trading at 12-13% of LME aluminium price YTD (current: 12.8%), which is significantly lower than the norm of 16-17%, signalling upside potential.

Forecast. Our earnings forecast is based on an average LME aluminium selling price per tonne of US$2,550, US$3,150 and USD3,250 for FY21-23F respectively. We have imputed these few key hedging assumptions: (1) 65% hedged at US$2,050 for FY21; (2) 55% hedged at US$2,200 for FY22F; and (3) 35% hedged at US$2,300 for FY23F. Our alumina cost per tonne forecasts are US$334, US$385 and US$444 for FY21- 23F respectively.

Maintain BUY with TP of RM7.42. Our TP is based on FY22F EPS of 13.7sen pegged to a P/E multiple of 25x, which is in line with its 3-year historical mean P/E. We may increase our ascribed P/E multiple for Press Metal as we note that the group deserves a premium in its valuations to reflect: (i) the group’s favourable cost structure as bulk of its energy costs are locked in via 15-25 year power purchase agreement (PPA) with Sarawak Energy Bhd; and (ii) its low carbon footprint as its smelters are hydro powered, making its ESG profile more favourable to investors.

Source: Hong Leong Investment Bank Research - 7 Oct 2021