We expect PMETAL’s 3Q21 results to come in at a record high with a net profit of between RM275m (+8% QoQ, +125% YoY) and RM300m (+17% QoQ, +146% YoY). If met, this would bring 9M21’s sum to RM736-761m, which is more than double vs. a core net profit of RM315m in 9M20. We are expecting a further QoQ spike in 4Q21 earnings, due to: (i) the full commissioning of PMETAL’s Phase 3 Samalaju expansion project; (ii) soaring LME aluminium spot prices; and (iii) additional earnings boost from its 25%-owned Phase 1 PT Bintan alumina refinery business. Maintain BUY with an unchanged TP of RM7.42 (25x P/E on FY22F EPS).

A promising 3Q21. PMETAL’s 3Q21 results are tentatively scheduled for release on 26 Nov. We expect core earnings for the quarter to come in at a record high – between RM275m (+8% QoQ, +125% YoY) and RM300m (+17% QoQ, +146% YoY), barring any unforeseen swings in cost structure. This will be driven by the following reasons: (i) higher LME aluminium spot prices, averaging at US$2,652/tonne in 3Q21 (vs. the average of US$1,742/tonne in 3Q20 and US$2,414/tonne in 2Q21); and (ii) further ramp up of the Phase 3 Samalaju project – resulting in increased sales tonnage in 3Q21.

9M21 earnings growth would be more than double YoY. Our 3Q21 core earnings estimate indicates that 9M21’s cumulative profits would range from RM736m to RM761m, signalling a 134-142% YoY growth from 9M20’s profits of RM315m. This would make up about 66-69% of our FY21F full-year forecast and 64-66% of full-year consensus estimates. We would deem the results to be within expectations as we expect a stronger 4Q as PMETAL would benefit from: (i) the full-commissioning of Phase 3 Samalaju project would start in Oct 2021; (ii) higher LME aluminium spot prices; and (iii) earnings boost from its 25%-owned Phase 1 PT Bintan project.

ESG Framework. We highlight a few of PMETAL’s ESG framework:

1) PMETAL’s smelters are mainly hydro powered. 
2) PMETAL has pledged to be carbon neutral by 2050. 
3) PMETAL targets a 15% reduction in greenhouse gas (GHG) emissions by 2025. 
4) PMETAL targets a 30% reduction in greenhouse gas (GHG) emissions by 2030. 
5) PMETAL aims a 10% water withdrawal reduction by 2030.

Forecast. Unchanged. 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 FY21-23 respectively. We have imputed these few key hedging assumptions: (i) 65% hedged at US$2,050 for FY21; (ii) 55% hedged at US$2,200 for FY22F; and (iii) 35% hedged at US$2,300 for FY23F. Our alumina cost per tonne assumption remains unchanged at a steady 16% of PMETAL’s aluminium realised base price forecasts in FY21-23.

Monumental future growth prospects. We are projecting PMETAL’s core PATMI to grow massively by 130% and 116% to RM1.1bn and RM2.4bn for FY21-22F respectively. This would represent a CAGR of 123%, which we reckon is a pretty scarce phenomenon for a large-cap company, in our view.

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 PMETAL 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; (ii) the scarcity premium of a growing large-cap, investible aluminium proxy in Malaysia; and (iii) its low carbon footprint as its smelters are hydro powered, making its ESG profile more favourable to investors.

Source: Hong Leong Investment Bank Research - 17 Nov 2021